Wednesday, April 22, 2009

Ilargi: The remnants of the present British government's political future are at risk even more with the presentation of today's Budget. It didn't help that the IMF said Britain would be hardest hit of all western countries by the financial crisis. PM Gordon Brown raised so much cain that the IMF actually withdrew part of its report late last night. What remains is still over twice as bad as what the government claims is the one and only reality. Why do we think that is?

What is certain is that the country will see skyrocketing deficits, soaring public borrowing and fast rising tax rates in the next 12 months. And that will all be laid out on top of mass lay-offs and huge losses in home prices. As people get poorer, taxes go higher. A recipe for political disaster, except perhaps if a recovery would be right around the corner. Which, but of course, the Brown cabinet says is the case. The IMF doesn't agree.

I’m by no means a fan of the IMF, but I still do think it's a good thing that its forecasts are becoming more realistic. Governments around the world are busy doing what Brown et al do: try to spin dirty ugly numbers into a story that is palatable enough to allow them to hold on to the reins of power, truth be damned. Whether that story and the policies that emanate from it best serve the interests of the people is nowhere near the number 1 concern. Which can and will have devastating long term effects on our societies.

The hold-on-to-power principle will rule the day in almost every single country in the world. Whereas we should be preparing for radical changes in the way we live and in which we organize our societies, we can't help ourselves from hoping and believing, against, and in the face of, no matter what is thrown at us in data and proof, that somehow the ruling classes that brought us down will lift us up again. But that is not their objective: all they want is to stay in control. Besides, it's a nonsensical notion to start with; more than anything else perhaps it reeks of Stockholm syndrome or stories of battered women so scared they can no longer even imagine simply walking out the door.

It's not about electing a new party or prime minister or president, you need to look at who's running the show from behind the respective curtains. In the US, nothing will be solved until the political power of banks and other corporations is broken, till lobbyists and campaign donors are shown the doors, and not the revolving ones, of the White House and Capitol Hill. The biggest players need to be broken into a hundred different pieces, a process that can start with reinstating Glass-Steagall and clamping down on securities and derivatives trading. And sometime down the line all of this will happen, but you don't need to look all that deep and hard to understand that in the end it requires unseating the most powerful, and unimaginably wealthy, moguls, families and dynasties in the country, the majority of whom have been in the saddle for generations.

To free themselves of these forces, to stop pretending everything will be hunky dory homemade moonshine and roses, our societies will first have to hit rock bottom. And we are a million miles away from that yet. So we will keep on paying attention to the likes of Gordon Brown and their power-hungry ilk. The one thing we do well is fool ourselves, and Brown, as well as his counterparts around the world, successfully count on that quality to keep them on their thrones. They don't want to tell us, and we don't want to see. A perfect fit.

Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year’s record $454.7 billion. Employers cut 3.7 million positions from their payrolls in the six months since the fiscal year began Oct. 1, and the unemployment rate reached a 25-year high of 8.5 percent in March. That suggests receipts for April -- the biggest month for tax collection -- are likely to come in well below April 2008, analysts said. With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

"Tax receipts are just collapsing," said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt "is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause." The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

At the same time, government spending has climbed 33 percent in the fiscal year through March, as relief programs such as unemployment benefits expand. Labor Department expenditures have more than doubled to $52.7 billion and payments by the Department of Health and Human Services have risen by $40.6 billion, or 12 percent. Spending by the Agriculture Department, which runs the food-stamp program, is 18 percent higher, or $9.9 billion more than in the same period a year ago. These increases will contribute to a record federal budget deficit this fiscal year. On March 20, the Congressional Budget Office forecast the shortfall will reach $1.85 trillion, dwarfing the previous peak. UBS estimates a budget deficit of $1.65 trillion, Ahrens said.

Rising unemployment and lower consumer spending helped drag income-tax receipts from individuals and small businesses down 15 percent in fiscal 2009 through March, compared with a year earlier. Data due in May will likely show that the recession curbed estimated-tax payments in the first quarter, while the drop in financial markets caused capital gains to shrink. With the tax cuts from President Barack Obama’s stimulus package also taking effect in April, "that combination is going to give you weak tax revenues," said Douglas Lee, chief economist at Economics From Washington, an independent consulting firm in Potomac, Maryland. From the start of the fiscal year through March, personal income-tax payments fell to $429.7 billion from $503.5 billion in the year-earlier period, according to Treasury budget statistics. That’s the first such drop since 2003, according to department records.

"There’s been a huge hit, not just to income but to wealth," said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. "The economy did not turn in the first quarter of the year." The numbers "are worse than most of us would have expected coming into the tax season." The federal government is also losing revenue from corporate tax receipts, which have fallen 57 percent from the first six months of fiscal 2008. Not only are companies earning less -- and paying less in taxes -- they are getting more in refunds. Obama’s economic-stimulus package included a provision allowing small businesses with losses in 2008 to carry back those losses for five years rather than two, so companies can claim refunds against taxes paid in the past. Business refunds in January through March of this year were $40.4 billion, almost double the $22.3 billion of a year ago.

Personal income-tax refunds are also higher than last year, up 11 percent to $207.8 billion. That may be because people who pay estimated quarterly taxes based their estimates on 2007 earnings, and overpaid as the economy collapsed in 2008, Lee said. States and cities are also being hit hard by unemployment’s effect on tax revenue. The 23,300 Wall Street jobs that disappeared in the year through February helped blow a $16 billion hole in New York state’s budget. State officials are trying to close the gap by raising taxes, which will likely restrain spending and slow recovery. The attack on bonuses led by members of Congress also hurts. As payments are scaled back or eliminated, tax revenue falls. It’s not just a problem for New York: Individual tax receipts were 4.5 percent less than forecast in Minnesota during February and March.

"While lower-than-expected withholding-tax receipts are always a matter of concern, this shortfall appears to be due to lower-than-projected bonus payments," the Minnesota Management and Budget office said in its April Economic Update. At the federal level, concern over the budget deficit extends beyond this year’s "disaster," Harris said. Social Security and Medicare costs are also rising as baby boomers age, and the Obama administration has a number of new programs beyond stimulus -- including revamping health care -- that it wants to spend money on. "It’s going to be a structural issue," Harris said. "You have a Congress that’s lost its fear of deficits, so it’s still going to be hard to turn the deficit around once the economy and tax receipts have recovered."

From Minnesota to Alabama, battered regional banks are warning a turnaround from the economic malaise is nowhere in sight. A series of large regional banks reported Tuesday that rising losses from bad loans plagued first-quarter results. And, that's forced names like U.S. Bancorp, Regions Financial Corp., and others to put more money aside to fortify against another wave of defaults. It demonstrates not just massive U.S. institutions like Bank of America Corp. are reeling as the industry pays for extending credit to shaky borrowers. Smaller players scattered across the country are also feeling the pain, telling investors a protracted recession means things will get worse before they get better.

"No significant turnaround will occur this year," Huntington Bancshares Inc. Chief Executive Stephen Steinour said after the Columbus, Ohio-based bank posted a $2.43 billion quarterly loss. He announced a nearly $300 million credit loss provision as the bank faces a stream of potential losses from commercial loans. Huntington is just one example of a bank struggling as a troubled economy and tight credit environment make it more difficult for consumer and business borrowers to pay their debt. Falling stock markets and rising unemployment also illustrate the breadth and depth of the economic stress, regional bank CEOs said. Investors have been paying particular attention to regional banks after BofA and Citigroup Inc. reported better-than-expected results through largely one-time gains and accounting changes. Regionals, which typically focus on bread-and-butter operations like lending and deposits, offer a purer snapshot of the industry.

"We're now dealing with an extreme recession, and the continued resolution of the over-indebted consumer," said Nancy Bush, an independent bank analyst. "This is not a 2009 phenomenon, but something we'll possibly deal with into 2011 to 2012." There was evidence of recession-minded consumers in the latest batch of earnings, she said. The banks reported a surge in deposits as Americans saved more, and there was a stream of refinancings due to decade-low interest rates. For instance, U.S. Bancorp posted record revenue from mortgage income during the quarter and an influx of new deposits. But the sixth-largest bank by deposits still reported charge-offs from delinquent accounts spiked higher by 25%. That rise caused profit to slide for the fourth-consecutive quarter, down 51% to $529 million.

CEO Richard Davis sees trouble ahead for areas like construction and development loans. He boosted U.S. Bancorp's provision for future loan losses by $530 million on expectations conditions will deteriorate further. "There is a slowing down of ... consumer appetite and commercial appetite in the last couple of weeks, maybe the last half of the quarter," he told analysts. "I think there is a reason to believe that as the cycle matures, people are becoming a little more careful." Regions, based in Birmingham, Ala., reported defaults by developers and other bad loans pushed profit down 77% to $77 million. The bank, whose losses more than doubled from a year earlier, also reported that nonperforming loans increased more than anticipated. Buffalo, N.Y.-based M&T Bank Corp., which counts Warren Buffett among its largest shareholders, said profit plunged 68% to $64.2 million. The bank more than doubled its provision for credit losses to $158 million as charge-offs mount.

KeyCorp, hit hard by troubled commercial loans, was forced to slash its quarterly dividend to raise an additional $100 million in capital each year. The move came after the Cleveland-based bank lost $488 million during the quarter, and added $857 million to its provision for future loan losses. Investors were also worried if banks will need more government assistance as loan losses increase in the coming quarters. The Treasury Department said Tuesday it has about $110 billion left of its $700 billion financial rescue fund, though that amount could grow as bigger banks pay back the aid. However, shares of regional banks recovered from initial steep losses Tuesday after Treasury Secretary Timothy Geithner said most U.S. banks have adequate capital and there are signals credit markets are on the mend. He made the comments during testimony before the financial bailout package's congressional oversight panel.

Insolvent financial firms must be allowed to fail regardless of size, a top Federal Reserve official said on Tuesday, as two prominent economists urged Congress to break up the biggest U.S. banks. In blunt criticism of the government Federal Reserve Bank of Kansas City President Thomas Hoenig told Congress' Joint Economic Committee that the design of a $700 billion bank bailout last year sowed uncertainty and slowed recovery. Citing the costs of the economic crisis, Nobel economic laureate Joseph Stiglitz and former IMF chief economist Simon Johnson also told the panel that it was in the interest of taxpayers to dissolve the largest U.S. financial institutions.

"The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just 'too big to fail.' I do not," Hoenig said. "Yes, these institutions are systemically important, but we all know that in a market system, insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations," said Hoenig, who will be a voter on the Fed's policy-setting committee next year. U.S. anti-trust rules should be used to break up the biggest banks to safeguard the economy, said Johnson, a professor at the Massachusetts Institute of Technology. He added the costs of the financial crisis already dwarf the damage done by industrial monopolies in the last century.

"The use of anti-trust (laws) to break up the largest banks will be essential," he said. "This is a very serious, imminent danger that needs to be addressed." Stiglitz made a similar point, arguing that the American people had not received anything like sufficient benefits from allowing such large financial firms to grow, versus with the costs of the crisis. "They should be broken up unless a compelling case can be made not to that," Stiglitz, a Columbia University professor, told the committee. The biggest 19 U.S. banks are being subjected to a battery of so-called stress tests to restore confidence in their soundness, with guidelines on the process due on Friday and the results on May 4.

Stocks fell sharply on Monday amid fear that some of them still face massive losses, as the severe U.S. recession forces loan default rates to continue rising. U.S. Treasury Secretary Timothy Geithner has signaled that no firms will 'fail' the stress tests, but Hoenig said this would be a mistake. "Actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost," Hoenig said. "Of particular concern to me is the fact that the financial support provided to firms considered "too big to fail" provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds," he said.

Nodding to anger among ordinary Americans over multi-billion dollar bailouts for rich bankers, Hoenig said some of these firms were simply too complicated, and too well-connected in Washington, for the good of the country. "These "too big to fail" institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions. When the recession ends, old habits will reemerge," he said. Hoenig also criticized the government's Troubled Asset Relief Program, or TARP, which was also separately chided on Tuesday by the Treasury's watchdog. "In the rush to find stability, no clear process was used to allocate TARP funds among the largest firms. This created further uncertainty and is impeding recovery," Hoenig said.

The government's "stress tests" of 19 large banks take a harsher view of loans than of other troubled assets, according to a Federal Reserve document obtained by the Associated Press. That approach favors a few Wall Street banks while potentially threatening major regional players. Regulators will use the tests to determine which banks are healthy, which need more capital and which might fail if the recession worsened. The Fed is scheduled to detail its methodology for the tests on Friday and release the results May 4. The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in. Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system. Under one scenario, the test assumes banks will see "no further losses" on these complex securities at the heart of the credit crisis. By contrast, it estimates that the banks' individual loans will lose up to 20 percent of their value. The methodology "certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months," said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association. He said banks' loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.

A spokesman for the Federal Reserve would not comment. A Treasury Department spokesman referred questions to the Fed. Regulators are running the tests on all financial institutions with assets of at least $100 billion. The 19 institutions on the list include an insurer, Wall Street brokerages and regional banks, such as Cincinnati-based Fifth Third Bancorp and Cleveland-based Keycorp. A spokeswoman for Fifth Third Bancorp said the bank would not comment. Keycorp did not immediately respond to requests for comment. The bank said Tuesday it lost $488 million in the first quarter, partly due to a large increase in its set-asides for loan losses.

Regulators will begin briefing banks Friday about how they fared in government-performed "stress tests," giving lenders an opportunity to debate the findings before they're made public a week later, according to government officials. The discussions will signal to some banks whether they'll need to seek additional capital, either from private investors or the Treasury Department. The stress tests seek to measure a bank's ability to continue lending under extreme economic conditions. To help shore up confidence in the banking sector, the government is expected to distinguish between banks that need more capital and those able to withstand a worse and prolonged economic downturn.

On Tuesday, Treasury Secretary Timothy Geithner said "the vast majority" of banks could be considered well-capitalized. But he also said the impact of the government's efforts to ease the financial crisis so far had been "mixed." Some indicators, such as interbank lending, "have improved significantly in the past few months," Mr. Geithner said in testimony before a congressional panel overseeing the Troubled Asset Relief Program, the Treasury's financial-sector rescue vehicle. But he said other areas, such as credit-card and commercial loans, remain troubled. "It is also important to point out that the cost of credit and terms of credit, even where they have recently declined, are still elevated," Mr. Geithner said.

In the stress tests, regulators used some estimates of likely losses on loans that were tougher than observers had expected. Under a more adverse scenario, which assumes a 10.3% unemployment rate at the end of 2010, banks would have to calculate two-year losses of up to 8.5% on their first-lien mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real-estate loans and 20% on credit-card portfolios, according to a confidential document the Federal Reserve gave banks in February that was viewed by The Wall Street Journal. Regulators are expected to have used other assumptions as well when measuring a bank's strength. Such scenarios could make banks with heavy exposures to these products appear weaker than expected.

"It's bad news because it's going to make the banks look worse off than people think," said Paul Miller, a managing director and head of financial-institutions research at FBR Capital Markets. To help coax private investment into banks, the government may separate firms into several groups based on their projected capital levels at the end of 2010. One possibility would be to group the banks by their ability to repay funds they received from the Troubled Asset Relief Program. The healthiest banks would be allowed to repay the money while the weakest banks would be directed to raise more capital. Those in between would be urged to not repay TARP funds now. The government plans to release on Friday an outline of how the tests were conducted, including the assumptions that regulators used to measure a firm's health. On May 4, some results of the tests are expected to be made public, though it isn't clear exactly how much information will be revealed.

Mr. Geithner said Tuesday the government will provide as much capital as banks need to continue lending. But with limited bailout funds at its disposal, the Obama administration would prefer that banks raise money from the private market. "If a judgment is made, in consultation with management, that a bank needs additional capital, it will be encouraged to raise that capital from private sources," Mr. Geithner said in his testimony. The government will provide additional capital in the form of convertible preferred stock "as a backstop until private capital becomes available," he said. To help banks that need to bolster common equity in order to better withstand losses, the government may convert its preferred stakes into common shares. But such a move would raise thorny issues about how active an investor the U.S. government should be.

Another way the government could help banks keep capital levels up would be to forgo the 5% dividend the government is due as a shareholder in banks that took TARP money. Of the biggest banks facing government scrutiny, analysts expect J.P. Morgan Chase & Co. and U.S. Bancorp to emerge among the strongest. Large regional banks are expected to face the biggest challenges.

Due to the lifting of the foreclosure moratorium at the end of March, the downward slide in housing is gaining speed. The moratorium was initiated in January to give Obama's anti-foreclosure program---which is a combination of mortgage modifications and refinancing---a chance to succeed. The goal of the plan was to keep up to 9 million struggling homeowners in their homes, but it's clear now that the program will fall well-short of its objective. In March, housing prices accelerated on the downside indicating bigger adjustments dead-ahead. Trend-lines are steeper now than ever before--nearly perpendicular. Housing prices are not falling, they're crashing and crashing hard.

Now that the foreclosure moratorium has ended, Notices of Default (NOD) have spiked to an all-time high. These Notices will turn into foreclosures in 4 to 5 months time creating another cascade of foreclosures. Market analysts predict there will be 5 MILLION MORE FORECLOSURES BETWEEN NOW AND 2011. It's a disaster bigger than Katrina. Soaring unemployment and rising foreclosures ensure that hundreds of banks and financial institutions will be forced into bankruptcy. 40 percent of delinquent homeowners have already vacated their homes. There's nothing Obama can do to make them stay. Worse still, only 30 percent of foreclosures have been relisted for sale suggesting more hanky-panky at the banks. Where have the houses gone? Have they simply vanished?Here's a excerpt from the SF Gate explaining the mystery:

"Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down. "We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory." If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They'd also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. One thing is certain, 600,000 "disappeared" homes means that housing prices have a lot farther to fall and that an even larger segment of the banking system is underwater. Here is more on the story from Mr. Mortgage "California Foreclosures About to Soar...Again"

"Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season...Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days....The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium."

JP Morgan Chase, Wells Fargo and Fannie Mae have all stepped up their foreclosure activity in recent weeks. Delinquencies have skyrocketed foreshadowing more price-slashing into the foreseeable future. According to the Wall Street Journal:

"Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008."

Another 20 percent carved off the aggregate value of US housing means another $4 trillion loss to homeowners. That means smaller retirement savings, less discretionary spending, and lower living standards. The next leg down in housing will be excruciating; every sector will feel the pain. Obama's $75 billion mortgage rescue plan is a mere pittance; it won't reduce the principle on mortgages and it won't stop the bleeding. Policymakers have decided they've done enough and are refusing to help. They don't see the tsunami looming in front of them plain as day. The housing market is going under and it's going to drag a good part of the broader economy along with it. Stocks, too.

Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators. The number of so-called prime borrowers at least 60 days behind on mortgages owned or guaranteed by the companies rose to 743,686 in January, from 497,131 in December, and is almost double the total for October, the Federal Housing Finance Agency said in a report to Congress today.

Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment, FHFA said. Fannie and Freddie are the largest U.S. mortgage-finance companies, owning or guaranteeing 56 percent of all U.S. home loans. Regulators seized Fannie and Freddie in September and forced out top management after examiners said the companies’ capital may be inadequate to weather the worst housing market since the Great Depression.

Tragedy struck Freddie Mac Wednesday morning, as Fairfax County, VA, police found the company's interim chief financial officer David Kellermann dead at his home, the victim of an apparent suicide. Freddie Mac, the struggling mortgage giant, was taken over by the federal government in September. The news of Kellermann's suicide was first reported by WTOP. Kellermann, 41, was the acting chief financial officer and senior vice president of Freddie Mac, and he had reported directly to CEO David Moffett, who resigned in March. Moffett, in turn, had only been in his position since September, receiving the job after the federal government took over the ailing company and ousted its leadership.

WTOP reported that Fairfax County police reported to the Kellermann home around 5 a.m. after his wife alerted them to her husband's suicide. According to Freddie Mac's website, Kellermann was responsible for the company's financial controls, financial reporting, tax, capital oversight, and compliance with the requirements of Sarbanes-Oxley. He also oversaw the company's annual budgeting and financial planning processes. Freddie Mac officials did not immediately respond to a call for comment.

Anyone looking to sell distressed mortgages may be pleasantly surprised at the potential demand for these assets, even if they face some tough bargaining on prices. New York-based SecondMarket, an online trading platform for illiquid assets, has seen nearly 500 buyers sign up since sellers began listing blocks of collateralized debt obligations, unsecuritized loans and mortgage securities - totaling less than $10 million apiece - earlier this month. Quotes sometimes put the bid and ask prices on these assets higher than what the market indicates. But there is still a huge mismatch between price expectations. As a result, a transaction has yet to be executed on SecondMarket, raising the prospect of holders being stuck with these assets unless they're willing to significantly lower prices.

This may change when the government sets up the public/private fund aimed at buying up these assets, however. Potential buyers of triple-A-rated residential mortgage securities are offering to pay anywhere between 30 cents to 70 cents on the dollar, according to Barry Silbert, chief executive officer of SecondMarket. In contrast, the derivative index that tracks subprime mortgages now trades at 35 cents on the dollar for triple-A-rated assets. This suggests that potential buyers are willing to put down more for highly rated assets that have retained their ratings through the crisis. Sellers however, want more and are looking to get anywhere between 50 to 80 cents on the dollar, according to Silbert.

It's a similar situation for commercial mortgage bonds with potential buyers and sellers apparently unable to meet on price. Interested parties are offering anywhere between 60 cents to 75 cents on the dollar. Sellers, meanwhile, are looking for between 65 cents to 80 cents on the dollar, Silbert said. "When the seller sees bids that low, they aren't going to sell," said Karl D'Cunha, a senior managing director at Chicago-based Houlihan Smith & Company, Inc., which provides valuation services. To be sure, there have been a few cases where buyers and sellers have been able to agree on a price for individual loans. Jeff Freud, founder and president of California-based LoanMarket.NET, which launched an online trading platform for unsecuritized loans in California last month, expects to close the sale of a second mortgage valued at less than $250,000 at a price of between 80 cents to 90 cents this week.

But for the most part, investors are reluctant to offer more without completing extensive due diligence. "People don't know exactly what it is they are putting a bid on," said Ron D'Vari, co-founder and chief executive of NewOak Capital in New York. "It's like trying to market a complex cuisine in MacDonalds." Sellers, on the other hand, are hesitant to book such low prices before the U.S. Treasury Department's Public-Private Investment Program, or PPIP, gets underway. The program will provide attractive financing to potential buyers of toxic assets currently stuck on bank books. Sellers hope that the government initiatives will generate fresh liquidity and in turn lead to higher valuations on these assets. Holders willing to sell ahead of PPIP "need the money," Silbert said. Even so, it's getting the ball rolling on price discovery of these hard-to-value assets. "Potential buyers want to see what other people are paying for these assets," said Freud.

Suppose that the Fed and Treasury are really trying to dupe investors and speculators into sinking private money into a housing and bank bailout? That is to say, suppose the Fed and Treasury are trying to lure private investors knowing full well they will lose money to avoid the taxpayers having to lose it instead? The ultimate taxpayer cost for all of these bank frauds is at least the cost of lost FDIC insured deposits and possibly also the cost of partially bailing out foreign sovereign bondholders that could withdraw from future Treasury auctions and drive up US interest rates. Because of government corruption, the cost also appears to include absorbing banks' bad loan losses.

Wall Street bankers own the White House, Senate Banking Committe and House Financial Services Committee and desperately want to avoid criminal investigations. Breaks in causation can eliminate criminal investigations by working over time to destroy evidence through homeowner refinancings, foreclosures and unloading "toxic" securities (meaning loans packed with fraudulent borrower information and where issuers knowingly misrepresented the securities with criminal intent, designed them to conceal known frauds in the loans underlying them). If the banks own the government, then why would the government bother to create a ruse to draw in private money? The answer is that it doesn't have enough money to bail out the banks by itself.

The current fiscal deficit suggests a $2 trillion shortfall by the time the government's fiscal year ends in October 2009. It might even be $500 billion or $750 billion higher because of ridiculously optimistic tax revenue estimates for the second half of FY 2009. The problem isn't whether taxpayers can be put on the hook for all of this, but whether the US government can convince buyers of treasury securities that it will be able to tax US citizens sufficiently over the next twenty years to pay interest and principal on this debt. There is a limit to US borrowing and while no one knows exactly where it is, the Fed and Treasury seem to have come to the conclusion that it's not enough to bail out the banks.

So how do you eliminate all the fraudulent bad loans and help banks roll over debt and sell foreclosures? First, the Fed and Treasury have bent over backward to try to create the impression that the banks can't lose. The Fed and Treasury handed hundreds of billions of dollars to the big banks and then did a secret backdoor bailout using FDIC's new $500 billion credit line to help finance the toxic asset "auctions" where the only folks who can bid using 93% taxpayer nonrecourse loans are banks that have themselves lots of toxic assets. They guaranteed bad debts. They pushed fake "stress tests" where the test methodology is to be announced after the test suggesting that Treasury is specifically designing the tests to allow the banks to pass them. And recently this did lure investors to drive the financials index up 91% in about five weeks. That makes it much easier for banks to raise capital by issuing shares.

How about using the Federal Reserve to buy down 30 year mortgage rates to 4.8% or 4.2%? How about a tax credit for buying foreclosures? These costly ruses aren't to help buyers "afford" foreclosures, they are to help sellers avoid dropping their prices. And according to the most recent statistics, about 50% of all home sellers right now are banks. The price the banks get for these foreclosures determines the losses they have to report. Recent media suggests that the uptick in foreclosures is due to various state moritoria expiring. I think the more likely explanation is that the recent bear market rally (the greatest rally since the 1930s) and interest rates a full point below pre-2007 records (we're talking 200 years here) combined with the Spring/Summer home selling season are a good time to sell.

Foreclosures are rising because the Fed and Treasury indicated to the banks that this is the best time they have to get rid of those houses on the open market. Banks had held off on instituting foreclosures and selling REO in quantities sufficient to clear their books because the market was in a horrible slump and they needed some traction. Putting those homes on the market when buyer pessimism was at an all time high would have resulted in huge price drops and possibly many homes not selling at any price. Now we have the Fed, Treasury, NAR, MBA, Congress and other groups all working together to make it appear to buyers that now is a great time to buy a house. The sole purpose of this is to allow banks to clear their foreclosure inventory and to make as many new foreclosures as is necessary at this time.

Ask yourself this question: Would a new home buyer be better off with a lower interest rate and a tax credit, or a lower purchase price for the home that is roughly equal to the value of the lower rate and tax credit in the sense of keeping the monthly payment the same? The answer is obviously the lower price. A buyer will pay lower property taxes and have greater equity and less risk of interest rate shock buying at a lower price. And a buyer can refinance a loan as rates fluctuate, but he cannot "re buy" the house at a lower price. The low interest rate and tax credit are gimmicks that push up prices to help sellers. Here, the sellers are overwhelmingly banks.

An interest only loan at 4.5% allows a borrower to qualify for double the loan he could qualify for at a 9% interest rate. This magic applies throughout the income spectrum. Clearly rates can't stay this low for long. A year? Two years? The cost in keeping rates this low will eventually bankrupt the federal government, so they will do it for a while, but not long enough to threaten their ability to borrow, which is the source of their power. When rates rise, home prices will continue their descent, and they may resume their fall before then as unemployment continues to rise. There are currently more than 18 million homes sitting empty in the United States. There are innumerable baby boomers, speculators and others who would desperately love to sell one or more homes each and are waiting for a "rebound" in housing to put their homes on the market. This shadow inventory will quickly arrest any upward price movement.

Banks will move fast now to foreclose to get in front of other home sellers who will take a few months to "get" that this is the big housing rebound and it will be over by the end of summer. The federal government wants to help its wealthy banker benefactors as much as it can. But government generosity is limited by risks to its own power. The one area where the Feds can't afford to lose is their ability to borrow. So the Feds need your help to bail out the banks. To help you feel better about it, they are engineering a temporary environment where bank stocks and houses look very attractive. That environment will probably last no longer than the end of the summer selling season.

In short, beware government agents, real estate agents and mortgage brokers with big smiles claiming now is the time to buy homes and bank stocks. There's a good chance that they are trying to unload a lot of inventory before it's too late. My guess is that sometime between August and October of this year, it is going to become obvious that housing is in for another very painful year of losses. Ben Bernanke and Tim Geithner are hoping you buy before then.

The International Monetary Fund said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize.The Washington-based IMF said in a new forecast released today that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent projection. The fund’s latest outlook highlights the precarious state in which the world economy remains, even amid signs the worst slump since World War II may be easing. Recovery isn’t assured and will depend on policy efforts to cleanse banks’ balance sheets and craft measures that spur demand, the IMF said.

"The key factor determining the course of the downturn and recovery will be the rate of progress toward returning the financial sector to health," the fund said in its semi-annual World Economic Outlook. "Even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past." Having said this time last year that the world economy would grow 3.8 percent in 2009, the IMF tied its more pessimistic assessment to a "recognition that financial stabilization will take longer than previously envisaged." Managing Director Dominique Strauss-Kahn foreshadowed the prediction of a contraction a month ago. The revised outlook comes a day after the fund calculated worldwide losses from distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crunch exact a higher toll on financial institutions.

"Financial strains in the mature markets will remain heavy well into 2010," the report said. U.S. regulators are putting some of the largest U.S. banks through so-called stress tests to determine the amount of capital each needs to withstand a further economic slide. Bank of New York Mellon Corp., the world’s biggest custodian of financial assets, yesterday said its first-quarter earnings fell 51 percent, more than analysts had estimated, to $370 million. Even as the IMF acknowledged "tentative indications" that the rate of contraction is moderating around the world, the fund said output per capita would decline this year in countries representing about 75 percent of the global economy. Advanced economies will continue to lead the slump by shrinking 3.8 percent this year and failing to grow in 2010, the IMF said. The fund cut its forecasts for this year and next for all the Group of Seven economies and said Germany, Italy and the U.K. will still be shrinking in 2010.

The U.S. economy will slide 2.8 percent this year before stalling next year and the euro area will contract 4.2 percent in 2009 and 0.4 percent in 2010, the report said. While Japanese gross domestic product will fall 6.2 percent this year, it will then rise 0.5 percent next year. Emerging and developing economies will grow 1.6 percent this year and 4 percent next year, reductions of 1.7 percentage point and 1 percentage point respectively from previous forecasts, the IMF said. They will suffer net capital outflows of more than 1 percent of GDP this year and only the highest- grade borrowers will be able to tap new funding. Growth in China, where the IMF said there is scope for further easing of monetary and fiscal policy, is forecast to slow to 6.5 percent this year before climbing to 7.5 percent in 2010. India’s economy will grow 4.5 percent in 2009 and 5.6 percent in 2010, compared with 7.3 percent last year.

While stopping short of predicting deflation, the fund said the risk was greater than during the last such scare earlier this decade. Consumer prices will drop 0.2 percent in advanced economies this year before rising 0.3 percent next year and there is a risk of a steeper initial decline, the IMF said. Policy makers were urged to "act decisively" and not delay their responses to the financial crisis. Balance sheets should be revived by removing bad assets and injecting new capital, the IMF said. Monetary and fiscal policies should be "geared as far as possible" to bolstering demand and where flexibility remains for more monetary stimulus, such as at the European Central Bank, it "should be used quickly," the fund said. "In advanced economies, scope for easing monetary policy further should be used aggressively to counter deflation risks," the fund said, forecasting interest rates to remain near zero in major economies.

Exit strategies also should be outlined for when recovery takes hold, the fund said. "Acting too quickly would risk undercutting what is likely to be a fragile recovery, but acting too slowly could risk a return to overheating and new asset- price bubbles," it said. Risks to the outlook remain skewed to the downside and include the possibility that policies will fail to stop weakening economies and financial conditions from feeding on each other. "In a highly uncertain context, fiscal and monetary policies may fail to gain traction," the report said. Meanwhile, the fund said confidence and spending could be revived faster than expected should investors endorse policy steps by authorities. Global trade is forecast to plunge 11 percent this year after expanding 3.3 percent in 2008, undermining economies that rely on exports such as those of Germany and China, according to the report. The crisis has prompted a "flight to safety" which boosted the major currencies.

The slowdown is hurting companies such as Caterpillar Inc., the world’s largest maker of bulldozers and excavators, which yesterday posted its first quarterly net loss in 16 years as a result of the global recession. Peoria, Illinois-based Caterpillar said it expects the world economy to decline about 1.3 percent this year. Chief Executive Officer Jim Owens has already cut more than 24,000 jobs since December. Such cutbacks will propel unemployment to 9.2 percent next year in the advanced economies from 8.1 percent this year, while in the U.S. the jobless rate will jump to 10.1 percent in 2010. The Labor Department said this month that unemployment in the U.S. climbed to a 25-year high of 8.5 percent in March.

The International Monetary Fund predicted that the 16 countries that share the euro will see their economy shrink by a painful 4.2 percent this year and warned of more distress if the European Union does not move quickly to fix financial problems on its doorstep in Eastern Europe. In its World Economic Outlook released Wednesday, the IMF conceded it underestimated the impact of the financial crisis on Europe in its last set of forecasts in January, when it predicted the euro zone economy would only contract by 2 percent this year. The latest IMF estimate says recovery should start sometime in 2010 but that overall output will still drop by 0.4 percent during the year. The Washington, DC-based international organization describes the United States as the "epicenter" of the global economic crisis, but predicts the euro zone will actually fare worse in 2009. It forecast the U.S. will contract by 2.8 percent this year, before posting zero growth in 2010.

The IMF said euro zone will likely fare better than Japan, where output is forecast to slide by 6.2 percent this year. However, in 2010 the IMF said Japan should be well on the road of recovery, growing an expected 0.5 percent. The IMF said the recession in the euro zone would be particularly severe in Ireland as its construction boom turns to bust and that Germany, the single currency area's largest economy, would contract by a hefty 5.6 percent as its export-dependent industries suffer in the midst of the worst global economic downturn since 1945. In January, the IMF thought Germany would only shrink by 2.5 percent. "Financial systems suffered a much larger and more sustained shock than expected, macroeconomic policies were slow to react, confidence plunged as households and firms drastically scaled back their expectations about future income and global trade plummeted," the IMF said.

The IMF took a swipe at Europe's economic authorities, arguing that the European Central Bank was too slow to react to the impending recession - as recently as July 2008, the bank actually raised interest rates to combat energy-related inflation fears even though Europe's economies were heading for much more difficult times ahead. It said the financial policies were still not "sufficiently comprehensive and coordinated" as many governments opted to "go it alone." Though governments across the continent have unveiled fiscal stimulus packages - some more than others - and the European Central Bank has slashed its main interest rate to a record low of 1.25 percent, the IMF said much more needs to be done to stanch the much broader problems in Europe's financial systems, notably those related to deteriorating loan books in Eastern Europe.

The emerging economies of Eastern Europe have suffered in the global recession because their main sources of capital and credit have largely dried up, prompting some - including Hungary, Latvia, Romania, Ukraine and Serbia - to go to the IMF for help to sustain their state finances and currencies. "There is an urgent need to build new or enhance existing EU schemes for mutual assistance so as to facilitate a rapid, common response to emerging payment difficulties in all EU countries and ideally in any country in the neighborhood of the European Union," the IMF said. This, it added, is essential to avoid a collapse in one country that could drag down others.

The European Bank of Reconstruction and Development, the World Bank and the European Investment Bank have put up a euro24.5 billion support package for Eastern Europe's banks. But the European Union rejected calls from some regional leaders, particularly former Hungarian Prime Minister Ferenc Gyurcsany, for a bigger aid package. Economists say loan defaults in Eastern Europe could hit Western banks active in lending to the region. Outside the euro zone, the IMF said Britain would likely be one of the worst hit economies because of its dependence on the housing and financial sectors. The IMF is now projecting that Britain's output will contract by 4.1 percent this year, much more than its previous forecast of a 2.8 percent decline. As in the euro zone, the IMF has pencilled in the beginnings of a recovery in Britain for 2010 but that overall output will still contract by 0.4 percent.

The International Monetary Fund has published some big and scary forecasts of losses banks and other financial institutions are likely to make in the coming couple of years. And the emergency service for the global economy has also made some eye-watering estimates of additional capital that banks may need to raise. Here are the headlines:

total losses for banks, insurers and other institutions from loans and investments in the US, Europe and Japan from 2007 to 2010 will be $4.1trillion or £2.8trillion - which is the equivalent of writing off the entire output or GDP of the United Kingdom for two years (a big number);

in the UK, the eurozone and what the IMF calls "other mature Europe", banks will need to raise a further $875bn of additional capital by the end of 2010 and perhaps as much as $1700bn - which implies that we'll see a good few more banks taken into public ownership.

Specifically on the UK, the IMF estimates that the costs to taxpayers (or us) of bailing out our big banks will be 13.4 per cent of GDP or around £200bn, rather more than the Treasury has been estimating or will factor in to tomorrow's budget. On the IMF's figures, only Ireland will suffer greater taxpayer costs as a proportion of GDP. In the US, the so-called stabilisation costs would be 12.1 per cent of GDP.

However, the Treasury says the IMF ignores the fees it has received for some of the financial support to banks that's been provided and it thinks the IMF is being too pessimistic on potential losses. The Tories of course argue that the IMF's assessment is just another manifestation of the costs to us all of the authorities' failure to rein in the lending bubble before it became almost lethally super-sized. Meanwhile the Financial Services Authority is not overjoyed that the IMF says British banks will have to raise a minimum of $125bn of additional capital and perhaps as much as $250bn. The City watchdog would make the following points:

a) it wouldn't disagree with the IMF's estimate that banks will incur further huge losses in the coming year or two;b) it believes British banks have already raised sufficient capital to absorb those losses safely;c) in measuring the capital ratios of banks (their capital resources relative to loans and other assets) the FSA is a bit bemused that the IMF doesn't seem to weight assets by their riskiness;d) the FSA would not disagree that over the long term banks will have to hold more capital relative to assets than recent norms, but the FSA believes it would be bonkers to force banks to raise this additional capital until the recession is over - because to do so now would further deter banks from lending and would deepen and lengthen the recession.

Here's the bottom line: Many may agree with the IMF's analysis and its desire that banks, including British ones, should raise more capital sooner rather than later. But the power to force banks to raise additional capital rests with national regulators, such as the FSA, not the IMF. And if the FSA doesn't believe that banks have an urgent need to raise capital, then banks won't raise massive amounts of additional capital (barring the disclosure of booboos that have somehow remained hidden).

UPDATE 00:05 The Treasury has shouted very loudly at the IMF. And the IMF has tonight withdrawn from the online version of its Global Financial Stability Report the table showing the costs to the British taxpayer of the bank bailout as being 13.4 per cent of GDP. That table is now, according to the IMF, "embargoed" - whatever that means.

Just how much can accounting skew the numbers? Ask John Mack. While rival banks used big one-time gains in the first quarter to boost profits beyond expectations, his bank, Morgan Stanley, disappointed investors Wednesday with a larger than expected loss. The culprit was wider credit spreads. Banks typically benefit from the difference between short- and long-term interest rates, not only because it leads to lending profits, but also because it leads to write-ups on their own debt. At Citigroup, the gain was $2.7 billion in the quarter. For Morgan Stanley, however, the widening spreads forced it to book a $1.5 billion accounting loss on its debt.

"Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads," said Mack, the chief executive, in a statement. The $578 million loss, or 57 cents a share, compared to expectations of a loss of 8 cents a share. Last year in the first quarter, the bank had profits of $1.3 billion. Still, it was an improvement over the fourth quarter ending in November, when Morgan Stanley had an $11 billion loss. Mack slashed the company's dividend to 5 cents from 27 cents. The bank switched its reporting to a calendar quarter to be in line with the schedule of other banks. For December, the month that was left out of fourth-quarter and first-quarter reports, it lost $1.6 billion.

U.S. Treasury Secretary Timothy Geithner said on Wednesday that the United States bears a substantial share of the blame for the current economic crisis but the world must work together to ease the strains. "The rest of the world needs the U.S. economy and financial system to recover in order for it to revive," Geithner told the Economic Club of Washington. "Just as importantly, we need the rest of the world to recover if we are to prosper again here at home." But a balanced recovery will mean that other countries cannot be "dependent on the U.S. consumer." He noted the International Monetary Fund, which will hold its semi-annual meetings here later this week, now foresees global growth shrinking 1.3 percent this year. "The lost output could be as high as three to four trillion dollars this year alone," Geithner said.

The top 10 recipients of the government's $700 billion financial bailout spent about $9.5 million on federal lobbying during the first three months of the year. The biggest spender was bailed-out automaker General Motors Corp., which devoted $2.8 million to lobbying in the first quarter of 2009. It has received $13.4 billion in government loans and could get $5 billion more, according to a government report released Tuesday. Failed insurance giant American International Group Inc. and banks Citigroup Inc. and JPMorgan Chase & Co. each reported spending more than $1 million to influence the government as they lived off federal money this year. AIG has gotten some $70 billion from the bailout fund -- including a fresh $30 billion infusion the government reported on Tuesday -- while Citigroup has received $45 billion and JPMorgan $25 billion.

The lobbying activity was revealed publicly in reports required to be filed with Congress. This year's first quarterly report was due Monday. Other major recipients of money from the so-called Troubled Assets Relief Program also had substantial lobbying costs in the first three months of this year, including:

• Bank of America Corp., which reported spending $660,000 lobbying while receiving its $45 billion in help; • Wells Fargo & Company, with $700,000 in lobbying costs and $25 billion in bailout money; • Goldman Sachs, which spent $670,000 while receiving its $10 billion; • Morgan Stanley, which spent $540,000 while also getting $10 billion in assistance; • PNC Financial Services Group, spent $135,000 -- nearly double what it did at the end of last year -- on lobbying while receiving a $7.8 billion lifeline; • U.S. Bancorp spent $170,000 on lobbying and got $6.6 billion in government aid.

"They say they're not using public money for these purposes, but in effect these companies are steering taxpayer funds to lobbying and campaign contributions," said Craig Holman of the watchdog group Public Citizen. "It's completely unjustifiable." The reports suggest that most of the bailed-out companies have beefed up their lobbying at least marginally since last year. Seven spent more to influence the government than they did in the last quarter of 2008. The largest increases apart from PNC were by Goldman, which spent 34 percent more on lobbying than it did at the end of last year; Wells Fargo, which spent about 21 percent more, and JPMorgan, which lobbied 19 percent more. AIG also devoted some 16 percent more money to interacting with the government, despite the "no-lobbying" policy it adopted late last year after receiving repeated bailouts. AIG said in its filing that it still had to spend considerable resources contacting officials during the first three months of the year. The communication was "in response to requests and to correct misinformation," the company reported.

"Consistent with AIG's lobbying policy, the company did not engage in any lobbying with respect to federal legislation in the first quarter of 2009." Still, Public Citizen's Holman noted that the lobbying disclosure law exempts expenditures made to comply with congressional hearings or to respond to requests by government officials for specific information. "What AIG's reporting is, in fact, influence peddling," he said. The disclosures also show that AIG has fired several lobbyists since the beginning of the year, including from the powerhouse firm Akin Gump Strauss Hauer & Feld, the prominent Republican company DC Navigators and The Washington Tax Group. Among the companies that reduced their lobbying activity were Bank of America, which slashed its costs about 20 percent, and GM, which spent 15 percent less than during the last quarter of 2008.

Credit-default swap dealers cut the volume of outstanding trades to $38.6 trillion last year as they tore up overlapping contracts amid pressure from regulators to scale down the privately negotiated market and reduce risk. Outstanding contracts fell 38 percent in 2008, the New York-based International Swaps and Derivatives Association said in a survey released in Beijing today. It’s the first annual decline, after the market increased 100-fold over the previous seven years as investors used the derivatives to protect against bond losses and speculate on creditworthiness. Traders have been rushing to cancel redundant trades as federal authorities seek to impose regulations on the market for the first time since it was created a decade ago. After the collapse of Bear Stearns Cos. last year, 17 banks that handled about 90 percent of trading in default swaps agreed to initiatives including trade compression to help reduce day-to- day payments, bank staff paperwork and potential for error.

"In the current environment, firms are intensely focused on shrinking their balance sheets and allocating capital most productively," said ISDA Chief Executive Robert Pickel, whose group represents dealers that control trading. More than 2,000 banks, hedge funds and asset managers trading credit-default swaps agreed to a "Big Bang Protocol" this month that aims to improve transparency and confidence in credit-default swaps. It changes the way the swaps are traded so that it’s easier to eliminate offsetting trades and move them through a clearinghouse. Regulators including the Federal Reserve Bank of New York have called for an overhaul of the industry that was blamed for speeding the collapse of Bear Stearns, Lehman Brothers Holdings Inc. and American International Group Inc.

The tear-ups, which don’t reduce the actual amount of default and market risk outstanding, may reduce the amount of capital that commercial banks are required to hold against the trades on their books. The U.S. banking industry had its first loss in derivatives trading last year, the Office of the Comptroller of the Currency said March 27. Commercial banks lost $836 million trading over- the-counter cash and derivatives contracts, including $9.2 billion in the fourth quarter, compared with a $5.5 billion gain in 2007. ISDA’s survey, which monitors credit-default swaps on single names and obligations, baskets and portfolios of credits and index trades, found the $38.6 trillion outstanding was almost evenly divided between bought and sold protection. The Depository Trust & Clearing Corp., which runs a central registry that captures most trading, puts the size of market at $28.2 trillion.

We are now about a month past the bonus backlash at the American International Group. It was on March 16 that President Obama said he had asked Treasury Secretary Timothy F. Geithner to "block these bonuses and make the American taxpayers whole." At the time, Mr. Obama also said: "This isn’t just a matter of dollars and cents. It’s about our fundamental values." Since that time, at least 15 of the top 20 bonuses paid in the United States were returned. And also since that time, there have been no announcements regarding the remaining bonuses or, for that, matter, any restructuring of the retention contract that A.I.G. currently has with its financial products division. This is the division that caused A.I.G.’s downfall and whose employees received these bonuses.

As you may remember, there is another payment due under that retention contract by March 2010. I could not determine the exact amount, but from the amounts already paid it appears to be about $200 million. So, knowing that the Treasury was under orders to block these payments, it was with some cynicism that I read the eight new agreements filed by A.I.G. at 7:43 p.m on Friday. These agreements document the government’s third reworking of its A.I.G. investment and include a securities purchase agreement for up to $40 billion and an amendment to the now $60 billion credit facility. Since Treasury has put its 77.9 percent share ownership in A.I.G. into a trust, these documents are the only way the government can directly exercise its interest over A.I.G.

My cynicism proved correct. The only thing in these agreements (accessible here, here and here) that the Treasury did to pursue these retention bonuses is to deduct the $165 million in total payments from the approximately $183.5 billion made available to A.I.G. In addition, the Treasury charged A.I.G. a commitment fee of $165 million to be paid from the operating cash flow of the company. Since money is fungible, and the government has now agreed to support the company anyway, the latter requirement is meaningless. But there was nothing else. Despite the many grounds contract scholars have put forth to claw back this money, there was no obligation to force A.I.G. to sue to recollect the bonuses and for the government to be able to direct that litigation. No prohibition on further contracts with the financial products subsidiary.

No language about the future retention payments that are to be paid. Clearly, the government has passed on over this issue. I wonder when Mr. Obama will let the public know about this? In fairness, there are some compensation limitations in the agreement. Essentially, golden-parachute and retention payments to senior executives of A.I.G. are now limited to 3.5 times their annual salary and bonus for 2008. In addition, the annual bonus pools payable to the senior executives in 2008 and 2009 shall not exceed the average of the annual bonus pools paid to them in 2006 and 2007. These are pretty weak restrictions.

I realize that this compensation issue is a distraction, and that we need to operate A.I.G. so it survives and returns the government money. But the government’s general conduct here shows the problem with its approach to A.I.G. It is deliberately hampering itself by negotiating with A.I.G. and limiting the government’s powers to actually control the company. Instead, the government hired Simpson Thacher to represent it. A.I.G. then hired its own lawyers at Sullivan & Cromwell and the two negotiated these intricately documented arrangements for each reworking of the bailout. There are now approaching 20 different agreements between the government and A.I.G. I wonder how much A.I.G. paid Sullivan alone to negotiate these agreements?

But the government is afraid to really do what it should, which is take control of A.I.G. as an owner. Given that the government has more than a $100 billion invested in the company, it is astounding that it should continue to write these agreements. Instead, if we controlled A.I.G. as the government could and should, it could simply monitor these payments. Moreover, it can begin to restructure the company to allow for its dismemberment or bankruptcy without systemic effects. In taking this approach, I believe the government is only creating the next mess there, and when there is another problem it will not be able to fully intervene. We will only have these complex and quite limited contractual rights. This will require yet more money since the government has deliberately hampered its other options. And that is what happened with the first two iterations of this bailout. Would you give someone $182.5 billion and not demand control over how it is spent?

Bank of America reported today a first-quarter profit of $4.2 billion, getting a boost from homeowners refinancing their mortgages. But investors appeared to focus more on the net $6.4 billion the company added to its reserve, called an allowance, for loan losses. The company said it boosted reserves as losses mounted on credit card and commercial real estate loans — in addition to continuing weakness in housing. Its stock dropped 24% on Monday, closing at $8.02. The chart compares its rise in nonperforming assets (NPA) to the rise in its allowance for loan losses. Despite the $6.4 billion addition to reserves, NPAs are increasing faster than reserves.

NPAs are loans with little chance of getting the borrower to pay up as well as real estate already seized from delinquent borrowers. NPAs totaled $25.7 billion on March 31, up 41% in just three months and up 229% from a year ago. And that does not include loans for which borrowers have missed a couple of payments, but BofA hopes they start paying again. (These include assets BofA got from acquiring Countrywide Financial and Merrill Lynch.) The allowance for loan losses totaled $29 billion on Mar. 31, or roughly 113% of NPAs. The ratio has been sliding. It was 127% on Dec. 31 and 190% a year ago. I created the chart to illustrate the trend; BofA doesn’t present the data that way. The numbers suggest BofA is either under reserving for losses (which would inflate its earnings), or is getting more optimistic about its ability to limit its losses on bad loans.

Japan's trade balance for fiscal 2008 suffered its first annual deficit in nearly three decades, data released Wednesday showed, underscoring the difficulty facing the export-reliant country in its attempt to get out of recession. The result also highlights how vulnerable the world's second largest economy is to the sharp slowdown in global trade triggered by the U.S.-originated financial crisis. The Ministry of Finance said Japanese exports plunged a record 16.4% to Y71.14 trillion during the fiscal year ended in March. Imports fell by 4.1% to Y71.87 trillion during the year, but the sharp fall in exports left the annual balance with a Y725.3 billion deficit, the first since fiscal 1980 when the country suffered a deficit of Y1.42 trillion. Finance and Economy Minister Kaoru Yosano took the news seriously, saying that "the government has to examine whether Japan's international competitiveness is weakening in the area of producing goods."

While the country's exports fell in all the major regions, a 27.2% slide in exports to the U.S. was particularly prominent. Driving the fall in exports to Japan's largest trading partner was a devastating 36.6% drop in auto shipments. Compounding problems for Japanese exporters in fiscal 2008 was a stronger yen, which cut into their earnings. The average dollar-yen exchange rate for the period was Y100.54 compared to Y114.93 in the previous year, meaning the yen was 14.3% stronger, according to the trade data. It was also lower than the breakeven dollar-yen exchange rate for Japan's exporters, which was Y104.7 in fiscal 2008, the Cabinet Office's annual survey of firms showed. For the current fiscal year, the breakeven point is Y97.30. The lower rate shows that exporters have adapted to relative yen strength, "through changes to hedging stances and their budgets," said Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ.

At 0720 GMT, the greenback stood at Y98.18, but dealers said they do not rule out the risk that the unit could fall below Y95 again in the near term, which would further hurt exporters. But the bigger problem would remain low overseas demand, they stressed. "Since the collapse of Lehman Brothers in the fall, Japanese exports have fallen at a sharp rate, and despite signs of slight improvement going forward, there is no real sense of recovery yet with figures like this," said Hirokata Kusaba, senior economist at Mizuho Research Institute. Reflecting these pessimistic views, the Ministry of Finance cut its assessment on the economy for the fifth straight quarter in its January-March report. It says the economy is "worsening and becoming severer." As overseas demand for Japanese cars, electronics and other high-technology goods dwindled, the country's gross domestic product shrank an annualized 12.1% in the September-December period.

Economists say the new trade data suggest an even bigger GDP shrinkage in the January-March period. While the data show exports fell slightly more moderately in March, down 45.6% on-year compared with a record 49.4% plunge in February, the monthly falls are still alarmingly big. The March trade balance eked out a surplus of Y11.0 billion, its second-straight month in the black. But that was only because a 36.7% fall in imports outpaced the drop in exports, as Japan's recession-stricken businesses and consumers scale back on foreign goods. The figure was slightly bigger than the average forecast of Y10.0 billion surplus, but was still very small by historical standards, economists said. While a trade surplus has traditionally signaled health for Japan's export-oriented economy, the March surplus indicated distress, many analysts said. Even optimistic observers who see signs that Japanese exports and imports may have hit bottom in February have ruled out any significant short-term improvement. They acknowledge that overseas demand remains low and Japanese consumers continue to cut spending.

"Given recent positive signs in overseas economic reports such as U.S. economic indicators, the worst for Japan's exports and imports may be over," said Hiroshi Watanabe, senior economist at Daiwa Institute of Research. But, he added, "a full-fledged recovery in overseas demand is unlikely yet, thus Japan's trade won't likely improve much this year." The data show that exports have now fallen for six straight months and imports for five. Analysts say the drops are interrelated, with smaller exports causing smaller imports. Weak overseas demand for Japanese cars, electronics and other high-end goods has forced companies like Toyota and Sony to cut production and jobs. That, in turn, has bred worries about job security among workers, prompting them to curtail spending and slowing overall economic activity further. Imports of crude oil, semiconductors and food have fallen as a result, a Ministry of Finance official said.

Spring has arrived and policymakers see "green shoots". Barack Obama's economic adviser, Lawrence Summers, says the "sense of freefall" in the US economy should end in a few months. The president himself spies "glimmers of hope" . Ben Bernanke, chairman of the Federal Reserve, said last week "recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles". Is the worst behind us? In a word, No. The rate of economic decline is decelerating. But it is too soon even to be sure of a turnround, let alone of a return to rapid growth. Yet more remote is elimination of excess capacity. Most remote of all is an end to deleveraging. Complacency is perilous. These are still early days.

As the Organisation for Economic Co-operation and Development noted in its recent Interim Economic Outlook , "the world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade". In the OECD area as a whole, output is forecast to contract by 4.3 per cent this year and 0.1 per cent in 2010, with unemployment rising to 9.9 per cent of the labour force next year. By the end of 2010, the "output gap" - a measure of excess capacity - is forecast to be 8 per cent, twice as large as in the recession of the early 1980s. In the US, the rate of decline of manufactured output compares with that of the Great Depression. Japan's output of manufactures has already fallen by almost as much as in the US during the 1930s. The disintegration of the financial system is, arguably, worse than it was then.

If the world experiences a "Great Recession", rather than a Great Depression, the scale of policy support will be the explanation. Three of the world's most important central banks - the Federal Reserve, the Bank of Japan and the Bank of England - have official rates close to zero and have adopted unconventional policies. The real OECD-wide fiscal deficit is forecast at 8.7 per cent of gross domestic product next year, with a structural deficit of 5.2 per cent. In the US, the corresponding figures are 11.9 and 8.2 per cent. Governments of wealthy countries have also put their healthy credit ratings at the disposal of their misbehaving financial systems in the most far-reaching socialisation of market risk in world history.

It would be impossible for such activism to have had no effect. We can indeed see partial normalisation of financial markets, with a marked reduction in spreads between riskier and less risky assets. The FTSE All-World index has jumped by 24 per cent and the S&P 500 by 23 per cent since March 9 2009. Purchasing managers' indices are picking up (see chart). More broadly, the chances of a manufacturing turnround are high: big falls in demand generate inventory build-ups and collapses in output. The latter are sure to reverse. China's growth is also rebounding. We can say with some confidence that the financial system is stabilising and the rate of decline in demand is slowing. But this global recession is different from any other since the second world war. Its salient characteristic is uncertainty.

Consider obvious perils: given huge excess capacity, a risk of deflation remains, with potentially dire results for overindebted borrowers; given the rising unemployment and huge losses in wealth, indebted households in low-saving countries may raise their savings rates to exceptional levels; given the collapse in demand and profits, cutbacks in investment may be exceptionally prolonged and severe; given massive and persistent fiscal deficits and soaring debt, risk aversion may lead to higher interest rates on government borrowing; and given the flight from riskier borrowers, a number of emerging economies may find themselves in a vicious downward spiral of weakening capital inflow, falling output and reductions in the quality of assets.

In short, as Stephen King and Stuart Green of HSBC note in a recent report, the exceptional dynamics of this crisis suggest a healthy scepticism about the timing and speed of recovery. What is most disturbing, moreover, is the scale of the policy action required to halt this downward spiral. This raises the big question: how and when might the world return to normality, with sustainable fiscal positions, strongly positive short-term official interest rates and solvent financial systems? That Japan has failed to achieve this over 20 years is surely frightening. What I find most disturbing of all is the reluctance to admit the nature of the challenge. In its policy advice, even the OECD seems to believe this is largely a financial crisis and one that may be overcome in quite short order. Even the latter looks ever more implausible: in its latest Global Financial Stability Report , the International Monetary Fund now estimates overall losses in the financial sector at $4,100bn (€3,200bn, £2,800bn). The next estimate will presumably be higher.

Above all, the financial crisis is itself a symptom of a balance-sheet disorder. That, in turn, is partly the consequence of structural current account imbalances. Thus, neither short-term macroeconomic stimulus nor restructuring of balance sheets of financial institutions will generate sustained and healthy global growth. Consider the salient example of the US, on whose final demand so much has for so long depended. Total private sector debt rose from 112 per cent of GDP in 1976 to 295 per cent at the end of 2008. Financial sector debt alone jumped from 16 per cent to 121 per cent of GDP over this period. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further.

The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last for ever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future. The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring. Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants.

I'm not sure if Goldman Sachs Chief Executive Lloyd Blankfein is a big Led Zeppelin fan. But the investment firm's first-quarter earnings release got me thinking about the British band's 1973 classic, The Song Remains the Same. Why's that? In the week since Goldman reported better-than-expected profit for the first quarter of $1.81 billion, it has becoming abundantly clear that not much has really changed at the firm. Goldman still marches to its own drummer and provides investors with the bare minimum of information about how it makes all that money. Indeed, except for the $10 billion in bailout money Blankfein is itching to give back, the $13 billion in government money it got courtesy of American International Group, and the $30 billion in government-backed debt the firm has sold, Goldman keeps acting as if the financial crisis never happened.

When it comes to the issue of disclosure, Goldman still looks a lot like a hard-to-crack black box that requires a lot of blind faith from investors. Much has been made of the "orphan month" in Goldman's earnings release. In switching over to a more traditional quarterly reporting system that tracks the calendar year, Goldman didn't incorporate its awful December results in its first-quarter numbers. In the press release discussing its earnings, Goldman never bothered to mention why it was excluding December's $780 million loss from its results. It simply included a table titled "Results for the one month ended December 26, 2008" buried in the back of the 12-page release. To be fair, the firm did discuss the December results during its conference call.

But even more significant may be Goldman's failure to publish a "financial supplement" that provides a detailed breakdown of the performance of its various business groups. It's common for big global banks to publish lengthy supplements along with their earnings releases. Business reporters, analysts, and investors turn to those supplements to get a real insight into a bank's quarter. When JPMorgan Chase (JPM) announced earnings on Apr. 16, for instance, it not only published a traditional 15-page release but posted a 40-page financial supplement and a 23-page investor presentation on its Web site. Not Goldman. The only other earnings-related filing posted on Goldman's Web site was a terse two-page report called "Non-GAAP Financial Measures." The brief item is a quarter-to-quarter comparison of various ratios and metrics for gauging performance.

One such measure is the firm's leverage ratio—a way to see how much risk the firm is taking compared with the assets on its balance sheet. And guess what? A space for the leverage ratio for the quarter just completed was included in the table—but it's blank. In the conference call, Goldman CFO David Viniar said the leverage ratio was 14.6. A Goldman spokesman says the firm believes in full disclosure and "will have even fuller disclosure in our upcoming 10Q." Now sure, some will say, "Who cares if Goldman keeps playing by its own rules, as long as it keeps making money and separating itself from the pack? Goldman may take risks, but at least its risks pay off—unlike at many other Wall Street banks." After all, Blankfein's desire to pay back the government's $10 billion in bailout money is a sign of strength.

But remember this: If the federal government hadn't rushed in to bail out AIG in the days after Lehman collapsed and hadn't poured money into the nation's banks, there's a chance Goldman would have found itself a victim of the crisis, too. Blankfein may not like to admit it, but his firm owes a lot to the actions the government has taken to keep the financial crisis from spinning completely out of control. And based on Goldman's current disclosures, savvy investors have reason enough to be skeptical. As we've already pointed out, much of the firm's profit in the most recent quarter came from its trading desk—the same group of bond and commodity traders responsible for much for Goldman's outsize profits during the credit boom. It's not clear how sustainable those results are, largely because Goldman discloses so little information about the inner workings of its trading activities.

One thing we do know is that Goldman's trading desk is still piling on risk. One important securities industry gauge for measuring the risk of a potential trading loss at the firm rose sharply over the past year. The "value at risk" measurement—which is supposed to project a firm's potential losses on any given day—rose 52% over the past year, to $240 million. Before the financial crisis, everyone on Wall Street used to joke that Goldman wasn't so much an investment firm as a giant, risk-laden hedge fund. It seems that old label still applies. So if you were looking for Goldman to become a bit more transparent and chastened after becoming a bank holding company and falling under the Fed's umbrella, think again. The firm's earnings releases and regulatory filings are as spartan and opaque as ever.

Martin "Hoot" McInerney, an auto retailer in southeastern Michigan for about 40 years, sold his Cadillac dealership for $5 million last year rather than wait for General Motors Corp. to determine his fate. "How many Cadillac dealers will GM decide it needs?" said McInerney, 80, who still owns seven other dealerships. "Someone says 600, maybe it’s only 150." Thousands of GM and Chrysler LLC dealers across the U.S. are preparing for the probability that as many as 5,000 of them will be forced to close because of an automaker’s bankruptcy. Dealers say they’re ordering fewer vehicles, cutting expenses, retiring debt and firing workers to preserve cash. John McEleney, chairman of the National Automobile Dealer Association, said he is scheduled to meet with President Barack Obama’s auto task force April 23 in an effort to prevent a "radical cut" in the number of dealerships.

"It doesn’t make sense to rapidly diminish your customers at a time like this," McEleney said in an interview today. He will also seek task force help in freeing up credit for dealer inventory financing and urge the panel to try to avoid automaker bankruptcies, he said. "We’re ahead of the curve and ready to absorb shocks if one of these manufacturers liquidates," said Sid DeBoer, chief executive officer of Lithia Motors Inc., a publicly owned dealership chain that said it relies on Chrysler brands for 32 percent of its revenue. Lithia has sold or shut 17 stores in the past year, using $100 million in 2008 from sales of stores and other property to help reduce debt 19 percent to $645 million, according to data compiled by Bloomberg. Medford, Oregon-based Lithia has cut its workforce to 4,500 from 6,000 a year ago.

GM, negotiating a restructuring with the U.S. Treasury Department after borrowing $13.4 billion, has said repeatedly it will sell or end the Saab, Hummer and Saturn brands. Pontiac and GMC are both under review, people familiar with the matter said. Chevrolet, Cadillac and Buick are GM’s other U.S. brands and are also sold in other markets. Chevrolet is GM’s top seller. Chrysler, which borrowed $4 billion, hasn’t publicly discussed discontinuing individual brands. If the Auburn Hills, Michigan-based carmaker doesn’t form an alliance with Fiat SpA, it said it will wind down operations, including all three brands, which support 3,300 dealerships that employ 140,000. "I’m urging all of our dealers not to spend money they don’t have to spend," said Earl Hesterberg, CEO of Group 1 Automotive Inc., a Houston-based operator of 100 U.S. and U.K. dealerships. "Of all the brands in peril, I’m least worried about Chevrolet. There will always be a Chevrolet."

For dealers, franchise cancellation means the abrupt loss of the right to sell new vehicles and spare parts, as well as to service vehicles under warranty. Each dealership, including building and equipment, often represents an investment of $1 million to $10 million. GM rose 4 cents, or 2.4 percent, to $1.70 at 4:15 p.m. in New York Stock Exchange composite trading. GM’s $3 billion of 8.375 percent bonds due in 2033 fell 0.44 cent to 9.06 cents on the dollar, yielding 90 percent, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The Detroit-based automaker has lost $82 billion since 2004, its last profitable year. U.S. sales of new cars and light trucks plunged 18 percent in 2008 as energy prices rose and consumer confidence fell. The sales rate in this year’s first three months was the lowest since the fourth quarter of 1981.

U.S. automakers, which have more dealers than their foreign counterparts, have said for years that they want to consolidate their retail networks as market share has fallen. According to the NADA trade group, the average Chevrolet dealer sells 586 vehicles a year, while the average Toyota Motor Corp. brand outlet sells 1,821. Dealers have been protected for decades by state franchise laws, which make unilateral termination of their franchises difficult, if not impossible. The federal code trumps state law, say bankruptcy specialists, allowing the automakers to shrink their retail networks at will. Autonation Inc., the biggest dealer chain in the U.S., "cut vehicle orders 60 percent in the first quarter," said spokesman Marc Cannon. "We intend to keep ordering very lean." Michael Charapp, an attorney in McLean, Virginia, who has 300 dealer clients, said "we tell them cash is king. You’ve got to keep the business lean in case something happens. Nothing should be spent on anything but essentials. Cut back on personnel."

Chrysler must merge with Turin, Italy-based Fiat by May 1 or risk the cutoff of rescue funds from the Treasury. GM, whose deadline is June 1, said in February it intended to shut down 2,100 of the 6,248 dealers it had at the end of 2008. That leaves dealers wondering who has to close shop and who gets to keep going. "You don’t really know which way to run, what to tell your employees," said McInerney, the Michigan dealer, adding his son was "disappointed" about not getting to inherit the family Cadillac business. If a dealer does get his or her franchise canceled, calls from bankers won’t be far behind. Most loan agreements for dealer inventories require immediate repayment in the event of bankruptcy. According to NADA, the average dealer inventory loan is $4.9 million; dealers collectively borrow about $100 billion nationwide. "If there’s a bankruptcy, things will happen quickly," Charapp said, noting that bankers usually have the right to seize and sell unsold vehicles to recover their loans. "The automakers won’t have time to be too selective. If they’re not careful they’ll lose good dealers who quit because they lose their wholesale financing."

The repercussions from GM and Chrysler franchise cancellations could spread swiftly to other carmakers. According to NADA, there were 19,790 new-car dealerships in the U.S. as of March 1, fewer than 3,000 representing a single brand. Since most dealers own multiple franchises, their borrowings often cover multiple brands and properties. If vehicles in a Chrysler showroom were seized and sold at auction, for example, the proceeds might not cover the dealer’s loan. A lender could demand repayment on related loans covering the dealer’s non-Chrysler brands. "We’re warning Toyota dealers to watch out, to segregate their finances as much as possible" from those of their GM and Chrysler businesses, said Jerry Pyle, chief executive officer of Gulf States Automotive Group in Houston, a Toyota wholesale distributor. A reason for keeping inventories tight is that panic- selling of unsold vehicles after a GM or Chrysler bankruptcy almost certainly would drive down prices and the value of all dealers’ vehicle inventories. "If the banks dump their collateral on the market, that would be a disaster," said David Fischer, a multiline dealer based in Troy, Michigan.

Is the American dream a nightmare?It was a startling and controversial conclusion. But now it is beginning to make more sense. It turns out that a high rate of homeownership just might be bad for the economy. Homeownership has been a long nurtured desire of many Americans. Public officials relaxed mortgage requirements 10 years ago because they wanted everyone to live the dream. It seemed to be great for the economy, until the crash last year. Americans weren’t the only ones who caught the fever. Some Europeans bought even more property and are suffering even greater consequences. Melanie Bowler, an economist at Moodys.com, has found that the hardest hit property markets in Europe were the ones with highest rates of homeownership.

Estonia, Latvia and Lithuania had a combined homeownership rate of 90 percent, and house prices in the region have fallen an average of 30 percent in the past year. In Britain, where the homeownership rate is nearly 75 percent, prices are down 17.7 percent since last year. One of the problems with such a high propensity for property is that these economies became more reliant on the housing industry for jobs. In Spain, where homeownership reached a bloated 85 percent and then lost steam, the rate of unemployment among construction workers has doubled in the past year. British economist Andrew Oswald first connected the increase in unemployment in Europe and the U.S. to the rise of homeownership way back in 1996. At that time his ideas were hard to accept because they bumped up against dearly held values. But his analysis is beginning to look prescient.

Unemployed homeowners are less free to take jobs elsewhere because they are tied down to one of the biggest investments of their lives. Owning a home, especially one whose value has plummeted, creates a doom loop. Wealth is tied up in property that can't be easily sold, and owners feel unable to seek new and better opportunities elsewhere. One of the grand ideas behind the European Union was to allow members with EU passports to work in member countries. The EU wanted to create a more fluid workforce, like the U.S. had, to help foster the creation of amazing centers of productivity such as the Sun Belt, Silicon Valley, the entertainment industry in Los Angeles, and the media and financial sectors in New York. Italians went to England, Germans moved to France — but Europeans' mobility did not increase as much as leaders had hoped. Workers were partly limited by language barriers — there are 23 official languages in the 27 countries that make up the European Union. They were also constrained by the ball and chain of property ownership.

A similar burden could now hamper America’s economic recovery. The urban theorist Richard Florida, author of “Who’s Your City?,” has predicted that more productivity centers will spring up across America in the future. But Americans will need to be able to flock to these places in order to find other like-minded individuals and begin building oases of economic activity without being confined by the shackles of property. Compared to some of the gluttonous Europeans, Americans’ hunger for property seems practically anorexic, even at its peak of 69.2 percent in 2004. But now is an opportunity to take some cues from countries that do not share the obsession to own and where property has not undergone radical price convulsions. With its pro-rental laws, Germany’s homeownership lingers at 48 percent, and its house prices have risen 2.8 percent in the past year. In Switzerland, where foreigners have not been allowed to buy property, only 39 percent of the population own their home. House prices there have remained stable.

The best level of homeownership for America might be 64 to 65 percent, the level it was until the mid-1990s, before the spike in buying occurred, according to the U.S. Census Bureau. After the trauma of this recession, which was triggered by the glut of poorly financed mortgages, it’s time to think of ways to stop steering people toward homeownership by making renting just as attractive as buying. Incentives throughout the U.S. tax code encourage individuals to buy property and deduct mortgage interest and property taxes, but there’s no uniform encouragement for renters. If any breaks are given to renters, they are distributed on an uneven, state-by-state basis. If rental incentives were offered nationally, citizens could decide for themselves the best path for their financial future instead of being lured toward homeownership with its irresistible promise and its deep limitations.

Our predicament is desperate but not serious, as they used to say in the Austro-Hungarian Empire. Britain’s budget deficit threatens to hit £175bn this year, or 12pc of GDP. That is just about the worst performance of any major country at any time in history, during peacetime. Gordon Brown’s sin as Chancellor was to run a fiscal deficit of 3pc of GDP at the top of the long boom, when other countries were prudently using their windfall tax revenues to build a storm buffer. Many ran surpluses in 2007: Finland (+5.3pc), Denmark (+4.9pc), Sweden (+3.5pc), Spain (+2.2pc), Australia (+1.6pc) and Canada (+1.4pc). Germany was near balance. This left Britain acutely exposed when the bubble burst, since the UK economy is by nature highly geared to global ups and downs. British tax revenues invariably fall off a cliff when trouble hits.

The result is that the UK national debt will jump from 44pc of GDP in 2007 to 78pc by the end of next year, according to Fitch Ratings. But at least we have the adult company of the US and Japan in our immediate debacle, and sibling allies in Europe’s Club Med and most of the ex-Soviet bloc. The US Congressional Budget Office (CBO) expects America to run a deficit of 13pc this year following the US bank rescue and President Obama’s fiscal package. The US national debt will rise from 41pc in 2008 to 65pc next year. What happens thereafter is the subject of fierce debate in Washington. The CBO fears the debt may ratchet up to 82pc by 2018, with trillion-dollar deficits as far as the eye can see. That gloomy prognosis seems to assume that the US political class lacks the discipline to retrench once the banking crisis passes. This is a matter of political judgment.

The good news is that Britain goes into the slump with a lower level of sovereign debt than some G7 states, thanks to the (now fading) Anglo-Saxon renaissance and the Thatcher reforms. The bad news is that our hard-fought gain has been squandered. Fitch calculates that the debts of Britain, France and Germany will converge at around 78pc by the end of 2010, all pressing against the limits of AAA respectability. Italy will reach 115pc. Japan is in a class of its own with debt nearing 200pc of GDP next year, not a happy picture for a country slipping into demographic decline. The working population peaked in 2005. The number of wealth creators needed to finance the debt shrinks year after year.

This curse has already hit Eastern Europe and will soon strike Germany, Italy, Spain and China. Britain’s ageing population crisis is less severe, which has major implications for the sustainability of debt over the long-run. The US and Australia are healthier. Brian Coulton, head of sovereign ratings at Fitch, said the Anglo-Saxons have another advantage. “While the US and UK are amongst the most directly exposed to the shock, they should bounce back more quickly because they have more flexible product and labour markets,” he said. “They have both shown in the past that they can cut debt fast (down 10pc of GDP over three years). France and Germany tend not to reverse fiscal shocks. There is a plateau effect,” he said.

Capital Economics fears the slump will do a lot more damage yet. “We think the UK debt could reach 100pc of GDP. Talk of British bankruptcy is over the top but it is going to take a very long time to cut deficit to acceptable levels,” said Jonathan Loynes, their UK strategist. Marc Ostwald from Monument Securities said it is not yet clear whether investors will recoil from Britain. “The danger is that the gilt market will buckle once the Bank of England has used up its £75bn and there is no longer a backstop buyer. If the Bank throws in another £75bn it will be even harder to unwind. There is no obvious way out of this.” All we know from a welter of global studies is that a 1pc rise in national debt tends to cause a rise in bond yields by roughly 10 basis points over time. Ergo, the real cost of financing Britain’s debt may jump by 2pc, 3pc, 4pc or even 5pc before this is over. Tighten your belt.

Chancellor of the Exchequer Alistair Darling forecast the worst recession in the U.K. since World War II as the banking crisis and rising unemployment curtailed spending and revenue to the Treasury. The government expects the economy to shrink by about 3.5 percent this year, more than twice the estimate in November for a slump of no more than 1.25 percent, Darling told Parliament in London today. He expects growth of 1.25 percent in 2010. "No country can insulate itself from this worldwide downturn," Darling said. "I expect the economy to start growing again towards the end of the year." The comments indicate Darling may boost borrowing and sales of government bonds to fund the budget deficit. The Treasury already is estimating it will sell a record 146 billion pounds ($213 billion) of bonds this year, more than double the amount in each of the past five years.

Darling will discuss his deficit forecasts later in today’s speech. Prime Minister Gordon Brown’s administration has pledged support for homeowners, people who lost their jobs and small businesses to soften the impact of the recession. Trailing the Conservative opposition in polls, Brown must call an election by the middle of 2010. The new estimates bring the Treasury into line with other forecasters. The Organization for Economic Cooperation and Development expects contractions of 4 percent in the U.K., 4.3 percent in the U.S., 6.6 percent in Japan, and 4.1 percent in the nations sharing the euro. Earlier, Darling told the Cabinet the slump would be the worst since World War II, according to Michael Ellam, a spokesman for Brown. "The chancellor said we were facing a global downturn, one that is unprecedented since the Second World War," Ellam said. "Of course Britain, being an open economy, with a large financial sector, cannot be insulated."

Britain’s 25 billion pounds of stimulus to date cost the government 1.4 percent of GDP this year, less than the programs worth 2 percent in the U.S. and 1.5 percent in Germany, the International Monetary Fund says. Yesterday, the Treasury said it will keep a lid on the deficit by saving 15 billion pounds through cost cuts and efficiency measures. The worst of the recession may already be over, according to the Confederation of British Industry. A gauge tracking service industries in the U.K. rose to a six-month high in March, and mortgage lending has increased. For Darling, making such a prediction would be risky, said Robert Chote of the Institute of Fiscal Studies. "Saying it would be tempting fate," Chote said before Darling’s speech. "He will want to be cautiously optimistic and not to give any hostages to fortune."

The last U.K. recession was in 1991. In his first budget on March 19 of that year, Conservative Chancellor Norman Lamont predicted the economy would contract 2 percent. Four months earlier, his predecessor John Major had predicted growth of more than 2 percent. Subsequent data revisions showed the economy shrank by 1.4 percent. This time the downturn is being driven by slumping house prices and the financial crisis. Brown and Darling have pledged to step up borrowing even as the budget deficit swells, to fund tax credits and spending that are intended to ease the impact of the recession on the economy. For now, unemployment is still rising. U.K. joblessness rose to 2.1 million in the quarter through February, the highest since Brown’s Labour Party came to power in 1997, the Office of National Statistics said today. "We will continue to do everything we can to help people into work and help people into jobs," Brown told lawmakers before Darling spoke today.

U.K. Chancellor of the Exchequer Alistair Darling’s prediction that Britain will return to growth later this year is at odds with the International Monetary Fund’s new forecasts.While Darling said in his annual budget today that the economy will expand 1.25 percent next year after a contraction of about 3.5 in 2009, the IMF expects the country to stay mired in recession. The Washington-based lender today predicted a contraction of 0.4 percent next year after 4.1 percent in 2009. Darling said today the U.K. will borrow 269 billion pounds ($392 billion) more than previously forecast as the worst recession since World War II saps tax revenue.

The scale of this year’s budget deficit, 12.4 percent of gross domestic product, limits Prime Minister Gordon Brown’s room to aid the economy before the next election, which must be held by mid-2010. "It’s a very, very optimistic set of growth forecasts," said Ross Walker, an economist at Royal Bank of Scotland Group Plc. "It seems that we have the worst of all worlds: huge tax increases alongside rather vague efficiency savings alongside optimistic growth predictions and scant evidence of any serious control of public spending." Over-optimistic forecasts may also increase the risk that Britain will have to raise more money through bond sales than it currently forecasts. "It means borrowing may be even higher and gilt issuance even larger than what he set out today," said Alan Clarke, economist at BNP Paribas in London.

Public borrowing has soared to a record £90 billion in the past financial year and unemployment reached the highest level since Labour came to power in 1997, piling pressure on Alistair Darling on the day he unveiled one of the most important Budgets in decades. The misery for workers was also underlined as private sector wages fell for the first time in nearly 20 years in the three months to February, official figures show. Net borrowing for March hit £19.1 billion, the highest level for a single month since records began in 1993, the Office for National Statistics (ONS) said. Borrowing for the year was £55.3 billion more than last year, smashing the Treasury's own forecast of £78 billion. The Chancellor was expected to reveal today that public borrowing would reach £170 billion between 2009 and 2010, a rise from the £118 billion figure projected in the Pre-Budget Report in November.

At the same time, data showed that the number of people out of work rose by 177,000 to 2.1 million in the three months to February, the highest number since Labour was elected 12 years ago. Mr Darling had prepared to outline a "Budget for jobs", including a £2.5 billion package to guarantee work or training for every young person out of work for more than a year. The number of people claiming benefits rose by 73,700 to 1.46 million in March. The increase is more modest than in February, when the number of people claiming jobseekers' allowance rose by a record 138,400 to 1.4 million. But the increased pressure on paypackets, and especially bonus payments, was further illustrated as annual earnings growth fell to only 0.1 per cent in the three months to February, the lowest growth recorded, down from 1.7 per cent in the three months to January. Private sector pay, including bonuses, fell by 0.5 per cent, the first annual drop recorded since March 1991.

Overall, public debt reached £743.6 billion by the end of March 2009 – equal to a staggering 50.9 per cent of GDP, up from 43.1 per cent at the end of March last year. Excluding the billions of taxpayers' funds that the Government has sunk into bailing out banks, the net dent is 41.7 per cent of GDP, which still breaks the Government's now defunct fiscal rules; these included a pledge that debt would never exceed 40 per cent of GDP in the economic cycle. Mr Darling was expected to say today that the final bill for rescuing British banks will reach £60 billion. The International Monetary Fund was forced into an embarrassing climbdown by the Treasury last night after it claimed that the rescue would cost the UK £200 billion, a figure that it had revised upwards from an earlier forecast of £130 billion.

In an earlier post I questioned the green credentials of ‘cash-for-clunkers’/'dosh-for-bangers’ schemes that provide financial incentives to scrap old, energy-inefficient cars early and purchase greener jalopies instead. The argument is simple. The total environmental impact of a car is the sum of the impact caused by its production and the impact of operating the vehicle over its lifetime. Scrapping my old hooptie earlier and replacing it with a more energy-efficient model will undoubtedly reduce the environmental operating impact of the vehicle. However, the subsidy is also likely to increase the cumulative production of vehicles. The net environmental impact depends on the balance of these two effects. I haven’t done the eco-engineering analysis that would enable me to give a convincing opinion on the net environmental impact of the scheme, but neither, as far as I can tell, has anyone else.

But at least as regards the impact on the demand for automobiles, the effect of the ‘dosh-for-bangers’ scheme is unambiguous. While the financial incentive is in effect, it will stimulate the demand for cars. If the incentive is credibly announced today but does not take effect until some time in the future (January 1, 2011, say), the demand for new cars will fall between the announcement date (today) and the implementation date (January 1, 2011). The reason is obvious: there is a strong incentive to delay the scrapping of your current clunker until you can take advantage of the financial incentive. If the ‘dosh-for-bangers’ scheme is temporary, it will also be followed, after it expires, by a period during which the demand for new cars is lower than it would have been without the scheme.

The UK Chancellor apparently is planning to introduce a subsidy of up to £5000 per car for purchasing an electric or hybrid car. There is no volume production of electric or hybrid cars in the UK. Electric or hybrid cars are not expected in the showrooms in any numbers before 2011. We will probably be waiting even longer for electric or hybrid cars that are mass-produced in the UK rather than imported. So I will postpone replacing my Rover 216 (1991 vintage) until Alistair Darling (or, more likely, his successor from among the current opposition parties) sends me a cheque for £5000 sometime in 2011. A most efficient measure indeed for reducing the demand today for cars , and especially for reducing the demand today for British-made cars . All this is standard stuff. Economists have for decades studied the effects on the timing and magnitude of investment expenditure of the announcement and implementation of immediate or future temporary or permanent investment subsidies and investment tax credits. There must be many bears of very little brain in the UK Treasury. The UK car manufacturers ought to be livid.

China's government is considering measures to regulate the torrent of bank lending, arising from concerns that much of the credit surge that has helped keep the economy growing could be wasted. A senior official at a local branch of the China Banking Regulatory Commission said the commission is considering rules aimed at ensuring that loans go to the real economy, such as government stimulus projects, rather than being diverted into the asset markets or bank deposits. A spokesman confirmed Monday that the rules are being circulated internally for comment.

How Beijing manages the flow of credit in coming months will be critical to the country's trajectory of growth. The explosion in China's bank lending this year -- compared with the contraction in credit in many Western countries -- has been crucial to shoring up consumer and business confidence, and to keeping China's economy expanding. A sharp cutback in credit would run the risk of derailing the nascent improvement, and is precisely what officials aren't planning to do. But they aren't pushing on the accelerator, either. The central bank has put interest-rate cuts on hold since December. The government is also expressing concern that the lending surge could be adding to financial risks or isn't directly aiding businesses in need of cash.

"Banks ought to fully realize that dealing with the impact of the crisis is a long-term task, and should pay close attention to risks accumulated from a burst of lending," the head of China's banking regulator, Liu Mingkang, said at the agency's quarterly meeting last week. He said he is concerned banks aren't properly checking borrowers, are lending too much to a few favored clients, and are doing too much short-term lending. Despite such problems, Mr. Liu also said Saturday that "the risks are controllable, because we have instructed banks to step up their checks on lending practices." He emphasized that banks have lots of room to continue to lend this year.

The government's concerns derive from the size and unusual structure of bank lending in China so far this year. In the first three months of 2009, China's banks extended 4.58 trillion yuan ($640 billion) in new loans -- nearly as much as all new lending for 2008 and equivalent to around 70% of the nation's gross domestic product for the quarter. An unusually large proportion of the new loans -- 1.48 trillion yuan, or about a third -- was in the form of short-term bill financing, usually used for businesses that need working capital quickly. Many analysts say there is evidence companies have been borrowing those short-term funds only to put them back on deposit and earn the interest. Some of the credit also has flowed into the stock and property markets, they say.

The bank regulatory official said the proposed rules are aimed at preventing those kinds of problems, and said the government doesn't intend to impose new administrative limits on the amount of loans banks can make. The guidelines could be a published document or an informal directive delivered orally to bank chiefs. A move to contain bank lending could spook investors, whose optimism about a possible recovery in China has been driving up Chinese and Asian stock markets. "Take away the flow [of] liquidity in a hurry, and we have to at least ask whether positive sentiment would continue apace or whether this could cause a relative correction," said UBS economist Jonathan Anderson in a note.

Bank lending is almost certain to slow from the first quarter's pace. In the past, Chinese banks have tended to frontload their lending early in the year, to book as much interest income as possible during the calendar year. Analysts expect the same trend this year, so some of the customary pullback by lenders will likely happen in coming months, even if the government doesn't squeeze credit. A slowdown in lending growth won't necessarily be a major shock to China's economy. If officials can steer more loans to needy borrowers such as small businesses than is currently the case, they may be able to get more economic bang for every buck lent.

Beijing Sunshine Care House opened in January 2008, seeking to attract the city’s elderly with a tropical conservatory, billiard room and calligraphy studio. By the end of this year, the retirement home will triple the number of beds to 700 -- and likely fill them all. "It’s an industry with a great market," says Zhao Liangling, Sunshine’s director, perched on a white leather armchair in her office. Zhao’s expanding customer base reflects a potential threat to China far greater than the current economic slowdown. The world’s third-largest economy is aging so rapidly that by 2050, there may be only two working-age people for every senior citizen, compared with 13 to one now.

That increases the urgency of the government’s pledge to expand China’s social safety net and make retirement benefits and health care accessible to as many of its 1.3 billion citizens as possible. China’s graying also requires a cultural shift, as the tradition of families caring for aging relatives at home becomes more difficult. "You can’t wait 20 years to start dealing with that problem," says James Smith, director of Rand Corp.’s Center for Chinese Aging Studies in Santa Monica, California. "People will talk about Chinese culture having very strong reverence for people who are old, but relying on that is very, very dangerous, because in most places those values are really altered with rapid development."

A baby boom in the 1950s and 1960s was halted by draconian population control that began in 1979, reducing China’s birthrate to 1.7 children per woman from more than six in the 1960s. The first in that bulge of people in the prime working years --between 25 and 64 -- is beginning to retire, putting a strain that will continue for decades on the smaller generation born since the start of restrictions on family size. China’s elderly, about 12 percent of the population now, will reach 30 percent by 2050, according to Smith, who has helped to develop surveys that track aging in 25 countries. He says China is unusual in confronting this problem before achieving developed-nation status, unlike other places with an aging population such as Japan.

More than a fifth of Japan’s population is 65 or older and that may rise to more than 40 percent by 2050, according to the National Institute of Population and Social Security Research in Tokyo. The country’s welfare ministry plans to cut pension benefits 20 percent by 2038, a larger reduction than the 15 percent projected in 2004 because of the increasing burden on the retirement system, the Asahi newspaper reported in February. China’s Confucian tradition places strong emphasis on the obligation to care for parents. Many older people live with sons or daughters and take the main responsibility for raising grandchildren, typifying the expression that "children around one’s knees is heaven." Fewer than 5 percent of the urban old and 2 percent of the rural elderly live in institutional facilities, according to Zeng Yi, a demographer at Duke University in Durham, North Carolina, and Peking University in Beijing. While such centers have mostly been a last resort of the childless or handicapped, that is changing.

Sunshine Care "is much better than living at home, there’s no comparison," says Tian Baofa, 76, a former newspaper photographer. "I’ve learned to use the computer, I play billiards; I never in my life before played billiards." He and his wife, Ge Nianjiu, 67, moved in last month. Their daughter is busy with her job, and their grandson is cared for by their son-in-law’s parents. "As China develops, more and more people will walk this path," says Tian, who pays Sunshine Care 2,300 yuan ($337) a month from his pension of more than 3,000 yuan. He is among a lucky few. China’s pension system covered 205 million people as of March 2008, according to the Ministry of Human Resources and Social Security, or about 15 percent of the population. The government aims to boost that figure to 223 million by the end of next year, it said April 13. Rural areas where the system is less developed face the biggest risk, undermining government efforts to narrow the wealth gap between city and country.

A pension program started in the 1990s covers only about 10 percent of the rural labor force, the World Bank says. Participants dropped by a third between 1999 and 2004, a setback Zeng attributes to the government’s shortsightedness and an assumption that families would take care of rural elderly -- although he notes that official attitudes are changing. Family support is undermined partly by the migration of younger workers to cities, which has contributed so much to China’s economic growth. Premier Wen Jiabao pledged March 5 to expand urban and rural pension coverage and develop a system that allows migrant workers who change jobs frequently to shift retirement benefits. He didn’t specify how much will be spent on these efforts, and the government has left targets vague, saying only that the numbers covered by the rural plan will "expand year by year."

Other initiatives include building four "demonstration bases" this year with investment of as much as 500 million yuan each in the cities of Beijing, Tianjin and Chongqing and in Jiangsu province, the English-language China Daily reported April 8. The centers will provide a model for the development of an elderly care industry, the report said. This year alone, Beijing plans to add 15,100 nursing-home beds, an increase of 43 percent. Ma Li, deputy director of the government-linked China Population and Development Research Center, says the country still must do more. "China is not yet ready for an aged society," she told the official Xinhua News Agency March 10 "It does not have a complete old-age social-security system. There are not enough resources. Fiscal support is scarce. And the risk is ever rising."

Estonia’s economic output may plummet as much as 15.3 percent this year should the recession in its main export markets including Finland and Sweden worsen, the central bank said. Eesti Pank expects the economies of trade partners such as Finland and Sweden to contract "almost" 4 percent, compared with a 3 percent contraction forecast in the beginning of the year, the bank said today in an e-mailed economic forecast. The global credit freeze and faltering domestic demand pushed Estonia and neighboring Latvia into the European Union’s deepest recession after the fastest growth in the 27-member bloc in 2006.

Estonia’s economy shrank 3.6 percent last year, the steepest decline since at least 1994, when the Baltic nation’s economy started to recover from a changeover to a market economy after independence from the Soviet Union in 1991. "A faster recovery by our trade partners would also raise economic activity in Estonia, while a longer-lasting global decline would also postpone our recovery," the bank said. "The clear perspective of joining the euro area is significantly raising Estonia’s credibility and will be the main factor supporting the economy in the near term." The cabinet of Prime Minister Andrus Ansip needs to cut the fiscal deficit by another 8.5 billion krooni ($702 million) on top of an 8 billion-krooni cut approved by the Parliament in March to ensure meeting the EU’s limit of keeping the budget deficit within 3 percent of gross domestic product, the bank said.

The Cabinet has slashed or agreed to cut the fiscal deficit by 10.6 billion krooni as it aims to adopt the euro from July 2010 at the earliest. Finance Minister Ivari Padar said yesterday the Cabinet will start discussing a further cut of 4.4 billion krooni next month. The $21.3 billion economy may grow up to 1.2 percent next year, the bank said. The worst-case scenario for 2010 would be a contraction of as much as 4.6 percent, it said. Estonia will have average annual deflation of 0.4 percent to 0.6 percent this year. In 2010, prices may decrease 1.5 percent to 4 percent, the bank said.

The International Monetary Fund agreed to give a $116 million loan to Tajikistan to help the Central Asian nation cope with a decline in export demand and lower remittances. A deterioration in the global economy has "adversely affected" Tajikistan’s main exports of cotton and aluminum, and threatens to erode gains in poverty reduction, the Washington- based lender said in an April 21 statement. Tajikistan can draw about $38.7 million from the three-year loan immediately, the IMF said. The government has "committed to raising transfers to households in response to the economic crisis, and increasing resource allocations for health and education, even though revenues are expected to decline on account of the crisis," said the IMF’s first deputy managing editor, John Lipsky. "Authorities are delaying some low-priority investment projects and scrutinizing current expenditures carefully" to meet deficit targets. Economic growth in the Caucasus and Central Asia will slow by two-thirds this year as exports recede and money sent from citizens abroad shrink, the IMF predicted last month. A slowdown in Russia is spilling over into countries including Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan, the fund said.

Water levels in some of the world's most important rivers have declined significantly over the past 50 years, US researchers say. They say the reduced flows are linked to climate change and will have a major impact as the human population grows. The only area with a significant increase in water flows was the Arctic due to a greater snow and ice melting. The study was published in the American Meteorological Society's (AMS) Journal of Climate.

From the Yellow river in northern China to the Ganges in India to the Colorado river in the United States - the US scientists say that the major sources of fresh water for much of the world's population are in decline. The researchers analysed water flows in more than 900 rivers over a 50-year period to 2004. They found that there was an overall decline in the amount of water flowing into the world's oceans. Much of the reduction has been caused by human activities such as the building of dams and the diversion of water for agriculture.

But the researchers highlighted the contribution of climate change, saying that rising temperatures were altering rainfall patterns and increasing rates of evaporation. The authors say they are concerned that the decline in freshwater sources will continue with serious repercussions for a growing global population. While some major rivers, including the Brahmaputra in South Asia and the Yangtze in China, have larger water flows, there is concern that the increased volume comes from the melting of glaciers in the Himalayas. This means that in future these rivers might decline significantly as the glaciers disappear.

Ooops, I posted this on yesterday's comment section a bit too late, so here it is:

I think the existential question that Ilargi is posing to Americans, is how we as individuals are dealing with the awareness (or lack of awareness) of being the Rich Man of the world.

Such a question makes us reflect on how our affluent lifestyles affect not only other human beings, but the environment and animals as well.

A few examples of things we are responsible for as individuals, whether we acknowledge it or not:

- The size and inefficiency of our homes and cars, which waste resources and generate pollution.

- Our frequent "vacations," which usually require the use of commercial aviation or driving cars long distances. As McKay and Bonnin's book "True Green" explains, "Aircraft emissions, released high in the atmosphere, have a greenhouse effect three times greater than road vehicle emissions. A single, one-way coast-to-coast jet trip will dump an additional ton of CO2 and other greenhouse gases, per passenger, into the atmosphere. That's double the emissions you'd release by driving cross-country in a carbon-producing SUV."

- The eating of industrial foods and flesh, especially beef, which takes 1500 gallons of water and 12 pounds of grain to produce one pound of flesh. Not to mention the suffering inflicted on these sentient beings.

I realize that all of us are complicit with the US Empire to one degree or another. We cannot totally escape it. Nevertheless, we are morally obliged to reduce our individual complicity. (We do not need the government or authority to tell us to choose a smaller car or have no car, or to eat less or no meat, for example.) How many Americans have made it a priority to decrease that complicity? I would say that most choose to fully partake and "enjoy" the complicity -- for example, buying tons of pointless rubbish at Wal-Mart or Macy's.

Yes, we are the bullies and the "Rich Man" of the world. What are you doing about it?

The self delusion theme is central to everyting - it's the Achilles' Heel of our species.

I'm a scientist at one of the world's most prestigious research universities, and the amount of self delusion among my colleagues about our biomedical research (what it accomplishes and the likelihood that it continues in near future) is thick enough to cut with a knife.

"I think the existential question that Ilargi is posing to Americans, is how we as individuals are dealing with the awareness (or lack of awareness) of being the Rich Man of the world."

Just like the British did before us. Well not exactly, the British considered everyone else 'The White Man's Burden' in order to exploit them. We've looked on them as something to bring the 'Light of Democracy and Freedom' to and then exploit them.

No Existential about that, just a straight up con job with the only question being who is fooling who?

Walter sat nervously in front of Stan. The were close friends in high school and had played football together. Walter had inherited his father's farm. Stan had gone off to college and was now an officer at the local bank.

"I'm afraid we have no more credit to offer you without additional colateral".

"I have my tools and my animals and my equipment and ..."

"I mean something of real value. Didn't you ever plan for future? Don't you have any stocks or bonds or precious metals?"

"I don't but ..."

In the end Walter left empty handed.

Two days later Saudi extremists detonated a small nuke at the main Saudi oil loading terminal. Two months later Stan sat nervously in front of Walter.

"I'm afraid I haven't got any more food to offer you without something in return to help my farm keep going".

"I have some stocks and bonds and precious metals ..."

"I mean something of real value. Didn't you ever plan for the future? Don't you have any tools or animals or equipment?"

"I don't but ..."

In the end Stan left with a dozen eggs, 20 pounds of potatoes and 10 pounds of beef.

I agree ... you are on a rollJust a few highlights from those articles.------ The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring.

Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants.by Martin Wolf ----------

But remember this: If the federal government hadn't rushed in to bail out AIG in the days after Lehman collapsed and hadn't poured money into the nation's banks, there's a chance Goldman would have found itself a victim of the crisis, too. Blankfein may not like to admit it, but his firm owes a lot to the actions the government has taken to keep the financial crisis from spinning completely out of control.One thing we do know is that Goldman's trading desk is still piling on risk.By Matthew Goldstein

---------Who makes money when you buy a car?the average dealer inventory loan is $4.9 million the average Chevrolet dealer sells 586 vehicles a year$4.9 million/586 vehicles a year =$8,362

Does this mean that if the banks were not in the revenue stream that the business would get to keep an extra $8,362?Capitalism, (business), should be helping the gov. in getting the bankers off their backs. jal

Weaseldog is not Lisa Kalvelage. Lisa is a woman born in Nuremberg Germany, a teenager when the Third Reich fell. She later was a war bride and moved to the United States. She was arrested in the 60's for blocking napalm trains and made a statement how she would not be considered responsible twice in her life for the crimes of her country. Pete Seeger picked up on it and turned her words into a song. Ani De Franco covered it and that version has become well known.

Groundwater has been dropping for decades. With water tables low, more water sinks into the Earth, and less flows into tributaries.

Before the white man came to the American Southwest, the deserts there were dry prairies, dotted with watering holes and had many small streams that ran year round. This is because the water table was higher, and low spots collected water. Further streams were fed by slow motion of water through water table. Water coming from a natural spring, might's landed as rainfall a year or more earlier.

As man pumped the water table lower, removing fossil water that had collected thousands of years earlier, natural springs dried up and ecosystems that supported a variety of wildlife gave way to the arid deserts we know today.

Now in Nevada, to account for this, we pump ground water to refill rivers, as part of an allotment program to justify pumping groundwater, to keep lawns green in Las Vegas. If we didn't refill the rivers, they'd be dry and the local wildlife that has thrived there for thousands of years, would vanish.

However, here in the US we also tend to forget the economic troubles we cause other nations.

Case in point, a good friend of mine is Ecuadorean and we talk a lot of economics and one of the points that always comes up is, "How long will most of the underdeveloped world continue to support US."

In other words, now that all we have is consumption and debt when does Central America and Indonesia say no more clothes for you? We are sick of being paid pennies a week and you sell and buy at hundreds of dollars or less dep. on where and what brand you buy.

The US has been living on the back of much of the rest of the world for a long time.

When that ends, the US is going to really hurt, much much more than just this depression that is looming!

We have completely stripped out manufacturing and local farming.

When the FIRE eCONomy shuts off, it is truly going to be Armageddon for this country!

Well maybe not Armageddon just yet, South Africa or Brazil seem very good models for the American future. South Africa has unemployment between 21-40% (40% being more realistic). It is a country with a very high income inequality, with a small minority controlling much of the country.

The elites live walled off from the rest of the world behind private security guards and electrified fences. While the vast majority live in poor conditions with little or no access to medical health care (though much better then most sub saharan Africans I might add)

The crime rate is also very, very high for a country with a population of 50 million. There are about 50 murders a day and about 50-60,000 rapes every year. Some parts of South Africa are very beautiful and prosperous - Cape Town comes to mind. But make no mistake, it's a country constantly in turmoil, Africa's latest Grand leader - Jacob Zuma is being elected as we speak. The judicial system dropped charges of blatant corruption on him and he was acquitted of rape earlier as coming from the Zulu community it would've incited political chaos in the country.

The GIC is through $ervus credit union in Alberta (formerly community $avings). The guarantee is backed by the credit union deposit guarantee corporation, they claim essentially the Government of Alberta.

1) A left leaning, anti- Vietnam War organization founded in the mid '60's by Tom Hayden. A more radicalized group splintered off to become "the weathermen." They choose their name from Dylan's line in Subterranean Homesick Blues, "You don't need a weatherman to know which way the wind blows."

2) The three letter stock code for a Proshares ETF derivative leveraged short. The aim of their rocket scientists is to purchase shorts and short options in such a fashion that the ETF will follow the S&P500 multiplied by minus 2. In other words, if the S&P500 goes down two percent, SDS is hopefully calibrated to go up 4%.

There are men who rape and kill children. If you don't do this, are you just as guilty, on the basis of 'crimes of omission'? Your argument says that you are.

Point is, when one stands by and watches that rape or infantacide doing nothing, that is in my mind a crime of omission. What have we in the west done otherwise? We don't even do the little we say we will do. Scroll this site.

When the government guarantees everything, nothing is guaranteed.Your dad's money should be as liquid as possible. Remember we are in a deflation, your cash is gaining much more value everyday. More than the 0.86% interest rate implies.

@vk The uranium recycling number there is flatly wrong, which makes me wonder about much of the rest. France recycles its reactor fuel, and for the last 15 years or so, the US and UK (I think France as well, but am not sure) have been recycling both Soviet and American bombs into reactor fuel. (Even Putin is glad to see leaking nukes leaving Kyrghyzistan). I don't have the number, but it's not within rounding range of zero.

1) Saudi Arabia desalinates 70% of its fresh water supply. The entire world could do the same. Small IFR nuclear power plants would be the juice. Connect to oil-pipeline type networks to distribute the desalinated fresh water widely. There's plenty of excess Ice cap melt in the seas now. WE could use some of that on land.

2) Start pipelining desalinated water to the margins of the Sahara Desert's 3,500,000 square miles... and elsewhere. Using only 5 % of the Sahara's landmass for growing food would feed the entire world population.

3) NanoSolar < http://www.celsias.com/article/nanosolars-breakthrough-technology-solar-now-cheap/ > is cheaper than coal solar cell technology. No less than the Carlysle Group has invested half a Billion in them. 'NanoSolar' will make it possible to have solar power generating plants replace existing coal fired plants... soon.

I am quite sure that the 'intelligent' contributors of this blog are guilty as hell. A real tragedy that humans can appear so 'intellectually' gifted and yet so profoundly ignorant (may I say stupid) at the same time. I wonder how many of them are dining on flesh today?

'Ït's not what you say that makes you who and what you are - it's what you do or fail to do'.

Maybe I bring down the wrath of ilargi here, but Raw Financehas an interesting model portfolio that some may be interested in. I am in 90% cash and 10% gold but likely this fall will possibly look at moving towards what this portfolio suggests (no MacDonalds - the company that revels in food inflation )